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Thursday, December 29, 2016

Toronto Real Estate Forum: The Ying and the Yang?

By Robin White (Toronto)

The 25th Toronto Real Estate Forum wrapped up earlier this month, and a soldout audience was treated to a potpourri of executives from major real estate companies, banks and pension funds; developers, economists and politicians opining on a variety of topics relating to the real estate business.

Having attended all 25 Forums, as well as many of the Property Forums that preceded the Real Estate Forum, I always found that I came away with a consensus on the state of the real estate markets, and where the business was headed.  

This time, it felt different. There were many contradictory opinions; here are just a few:

·         Interest rates were going up; interest rates were going to stay lower for longer.

·         Bond yields were heading up leading to higher financing costs; therefore, higher cap rates and, thus, lower prices. The recent rise in bond yields is short term, and they will revert to their previous levels or drop even lower, thereby reducing financing costs and, consequently, cap rates.

·         There will be an ongoing trend towards urban development as millennials seek opportunities to live and work in the urban core; the suburbs will experience a rebirth as millennials seek more attractively priced homes in which to raise a family.

·         The effects of the Trump presidency and Brexit will have a major impact on the future of the U.S. and European economies; the powerful secular forces that are present around the world will transcend any of the impact of Trump or Brexit.

·         Canada is in a wonderful place right now. We are seen as a good place to invest, because of our stable and transparent government and economy; Canada is irrelevant in the global scheme of things.

·         All levels of government have massive levels of debt to contend with, and are still running deficits; we have never amassed such a high level of cash looking for a home.

·         In the next 10 to 20 years, technology could affect up to 70% to 80% of the existing workforce; unemployment levels in the U.S. are at a low point.

My father used to say if you are not confused, it is because you have not been paying attention.  There is no question that anyone who was paying attention at the forum must have been somewhat confused.

So what are we to make of it all?

In my career, I have been through four recessions. Some have been more severe than others. Looking back at all of them, there were telltale signs in advance of the recession that should have been harbingers of things to come. These signs included companies overleveraging, undisciplined financing, speculative development, undercapitalized developers, junk bond activities, commercial mortgage- backed securities and so on.

There will be another recession. That is a fact. The questions are: When? And what can we do to prepare?

Coming away from this year's forum, although there were many conflicting views expressed, it is difficult to pinpoint any particular reason why we will see a recession in the near term. I am in the camp of interest rates being lower, at least for the next few years. There may be some short-term corrections, as we saw with the recent rise in bond yields, but I do not see any major forces likely to increase long-term interest rates – a situation that is good for our business.

Possibly, the biggest takeaway for me was the air of positivity that existed throughout the conference. Despite the confusing signals expressed in the breakout sessions, my many conversations with attendees at the coffee breaks, the cocktail parties and the dinners were all extremely positive and uplifting. 

And, perhaps, this is the most important takeaway of the 25th Real Estate Forum. When the attendees are positive and the mood is uplifting, they generally spell a positive outlook moving forward.

So let's make a toast to that, and may I wish everyone the best for a very happy and prosperous New Year.

(Robin White is Chair of Avison Young’s capital markets group and a founding Principal of the firm. He is also a Company Board Member and sits on the firm’s Executive Committee. 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.) 

Friday, December 9, 2016

Outlook for 2017: It’s the seventh inning, but how long is this ballgame?

by Mark E. Rose (Toronto)

Take me out to the ball game!

It is only fitting that, in a year full of upsets, the Chicago Cubs celebrated their first World Series win in 108 years. The nine innings of American baseball have become a metaphor for the global real estate market cycle, but given the many variables of the current climate, just like the World Series finale, this cycle may be going into overtime.

Redux, or changes ahead?
The commercial real estate industry will end 2016 as it began – with low interest rates, low cap rates and moderate GDP growth in most nations. But it does not feel like the same environment heading into 2017. Rising protectionism and political unrest have introduced a healthy dose of fear and skepticism as to where we are in the current market cycle and what comes next. Despite job growth, improving market fundamentals and superior yields to alternative investments, commercial real estate owners, occupiers and investors disagree about how long this cycle could – and should – continue.

Pundits have taken both sides of the interest rate debate – from low rates indefinitely to a gradual return to historical levels (normalization). Meanwhile, virtually all developed countries piled on additional debt, ensuring that no government would lead the charge to raise rates. Economists disagree about how best to proceed, but a majority of business executives understand that we need to normalize rates one day – and sooner rather than later. It is hard to conceive a climate with less consensus.

Buyers and sellers used Brexit and the U.S. presidential election to pause and gather data points. Decision-making might have slowed in 2016 but, as we discovered while compiling the Avison Young 2017 North America, U.K. and Germany Commercial Real Estate Forecast (due out January 12, 2017), the appetite for investment in real estate continues unabated. The overarching themes of global financial growth from a depressed base and global population topping 10 billion in the next few decades provide strong support for everything related to real estate. Technology is a game-changer, potentially impacting what, where and how properties get used and constructed. If history is a guide, technology – like immigration – has redistributive impacts but can create meaningful positive economic growth for decades to come. 

We will start off from a similar place in 2017. Prices are at historic highs, liquidity is available, but natural tensions are rising. Decision-making has slowed and fear of this cycle coming to a close is stressing financial models and generating negativity. New York-based retail and housing are examples of city-specific product types that are going through a correction, but retail and housing in general are alive and well. Investor Sam (Grave Dancer) Zell is calling a top again, but the timing of such predictions remains to be seen. It is likely that markets that enjoyed disproportionate gains earlier in the cycle are taking a pause as investors look more broadly for opportunities. In a classic cycle, what we would expect next is a wave of consolidation that pushes prices even higher prior to a broad-based market reset.

The case for extra innings
Let’s pivot back to the baseball analogy. The widely held opinion is that real estate is in the seventh inning. At Avison Young, we disagree. We see something very different. We might be in the seventh or eighth inning from a pricing perspective, but given the market forces and attributes that currently exist, we could be in the seventh inning of a very long extra-innings game for our industry. Real estate is a legitimate investment alternative and is currently producing higher current yields than stocks and bonds. In fairness, interest rates are providing support, if not stimulating over-performance, due to the capital intensity of property investments. As long as rates hover near zero in most advanced industrialized countries, real estate will remain a preferred option for pension funds and other global investors. 

Geopolitical events, such as Brexit, are mainly playing out in the currency markets with the British pound and the euro taking significant hits against the U.S. dollar. Energy and commodity volatility are also repricing countries like Canada, whose currency lost ground against the U.S. dollar. But in each case, the change in currency has made these countries more competitive for exports and, effectively, put hard assets “on sale” to investors flush with cash and benefiting from a stronger currency. The U.K., Germany and Western Europe, Canada and Mexico boast some of the largest GDP markets in the world and global trade has not seized up – nor will it. The U.S. and Canada, in particular, are blessed with resources, technology hubs and growing workforces. As a result of these factors, along with safe-haven status and low interest rates, North America has been the preferred destination for global capital, and will continue to be in 2017.

Additionally, investors in this region are beginning to harvest gains, creating a “wall of capital” to take advantage of any dislocations in the marketplace. This wall is one of the reasons we are predicting that North American global investors will have the U.K. and, specifically, London in their sights in 2017. We believe that well-timed portfolio acquisitions could produce significant returns.

To get the full story on Avison Young’s outlook for 2017, including forecasts for the office, retail, industrial and investment markets throughout North America, the U.K. and Germany, watch for our 2017 Forecast Report on January 12, 2017. To ensure that you receive a copy, please contact the Research Manager at your local Avison Young office or sign up here:

On behalf of the board of directors, Principals and the entire Avison Young family, we wish you the happiest, healthiest and most prosperous 2017!

Monday, November 28, 2016

Riding the Maverick – Reframing how we Speak about Technology

By Amy Erixon, Toronto

Over the past month, I have spoken on technology trends in the Real Estate Industry at four events in four countries, which provided me with an important epiphany - how much our choice of language matters.   Words convey more than descriptors, they convey intentions, which stir up emotional reactions, even if subliminally.   We speak about technology as an "opportunity", "exponential game changer", as a "disruptor", or in some settings, we don't speak of it at all.  

The recent session in Dallas, TX at the Fall ULI Meeting was entitled:  Riding the Maverick – Surfing the Wave of Disruptive Technology (to view my remarks, click here).   The other panelists were from Google Fiber; Branch Technology (a 3D Printing based building systems contractor); and Green Street (Wall Street analysts) who addressed implications of autonomous vehicles, construction technologies and full access to the internet for our cities and society, respectively.  (The full session is available to view on the ULI website).   There is abundant good news here:  the price of commuting is expected to fall from 75 cents per mile to 15 cents per mile; significant improvements are likely in material performance (up to 50% greater insulation and 70% less cost and carbon footprint); and we may soon be in a position to provide equal access for all of society to “outside of the classroom” education and training opportunities – nearly for free.   But, regardless of how much benefit might accrue - the very title of the session, and much of what we read these days about technology is dystopian – suggesting a soul-less world that upends society as we know it  - a world filled with car robots that render work by actual people obsolete.   This image is misplaced.  

2016 Exponential Technologies for Real Estate                       Source: Cisco

By contrast, my Canadian program was entitled: Exponential Technology for Real Estate - Opening a World of Opportunity.  It is easy to be awed by the wonderful innovations around us, some of which are illustrated above.  But the more difficult truth is that technology is often equalizing, which by definition, is political, and herein lies the problem.  I am often asked why the populist revolt taking shape in many western economies isn’t gaining traction in Canada (so far).   This is not because technology is behind in Canada – on the contrary, some of these very technologies are quite advanced and in use in Canada.  In Canada the newspaper, public television and even the politicians go to great pains to explain how technology will facilitate the country's well being and global competitiveness instead of scare mongering that: foreigners are stealing jobs, competing unfairly or that there is nothing any of us can do about becoming a thriving part of the future other that return to a reimagined past.  

The US used to promote a culture that embraced equal opportunity, and it still reveres innovation (even if it is frightened by it).   Without a clear roadmap about how the economy will make the transition from the "old" to the "new" economy (which is inevitable) - together with the requirement that a share of the profits accrued from the "new" ways soften the blow, and provide retraining opportunities for those left behind (pretty basic economic policy in most of the developed world), it is understandable why the general population feels threatened.  

It is also true that many of the professions most “in harm’s way” if you choose to look at it from that perspective - are male dominated – truck and taxi drivers, construction workers and “the non-college educated”.   But the industries poised to see the most job growth in the near future:  health care, computational data analytics, green energy, social media, marketing and IT systems management are not gender or ethnicity biased, which is a blessing.  There will be far more jobs created than displaced by technology over the next 10 years - we know this, we understand this, the issue that needs to be addressed is the mismatch between the workforce skills, our educational systems and the jobs of the future.  For an insightful analysis of this topic see:

Technology adoption does not happen overnight, regardless of how compelling the value propositions might be. The reasons are myriad and sometimes complex, ranging from political clout of existing or future stakeholders, to lack of underlying infrastructure, to intractable funding schemes to lack of training opportunities.  Like it or not, most solutions will have to come from new models of collaboration between government, the non-profit and the private sectors.  Moving forward can pay big dividends if each is able and willing to contribute its creativity, ingenuity, flexibility and  expertise to fashioning solutions instead of letting these discussions devolve to women vs men, generational warfare, anti-immigrant rhetoric.    NOW is not too late for this important planning to begin.  

Friday, September 30, 2016

Avison Young Recieves GRESB Award

By Amy Erixon, Toronto

In 2015 Avison Young became a Green Star award recipient in the Global Real Estate Sustainability Benchmark, or “GRESB” Index.   Founded in 2009, the Benchmark is the gold standard for ESG reporting by institutional property investors and their advisors.  The Index currently includes 22,000 individual properties located on 6 continents in 37 countries valued at USD $ 2.3 Trillion.  GRESB is different from energy star and other types of environmental scorecards in that it evaluates corporate governance, social responsibility as well as environmental performance at the management, entity and property levels. 

Key Performance Indicators, GRESB Universe
Institutional owners in Canada, Australia and other leading countries are beginning to make concerted efforts to improve environmental performance and mitigate climate risks.  Same store portfolio performance within the GRESB index from 2014 to 2015 improved 1.2-2.0% for energy, CO2 emissions, water consumption and landfill waste.  Year over year same store Index Performance 
Indicators are detailed in the sidebar.  

The benchmark is used by members to optimize the risk return profile of its investments.    It assesses the management contribution (value add and risk mitigation effectiveness) on the part of 227 entities, 60 of whom are pension funds. The GRESB index assesses a large number of aspects – at the property level from building certifications to monitoring and EMS, at the management level examining ESG integration, risk mitigation, policies, disclosure and performance targets, and at the social level assessing communications, leadership, procurement and stakeholder engagement. 

In addition to providing a roadmap for companies looking to improve their ESG policies and reporting, GRESB provides a peer group ranking to provide context for investment decision making. More information about the benchnark and 2016 results can be found at:

Wednesday, August 24, 2016

Setting Things Straight on Crowdfunding

By Gary Lyons (Raleigh, NC)

The process of crowdfunding is often misunderstood. People are using this term loosely; as a result, there is a fair amount of confusion surrounding this capital-raising technique.

Many recognize the or websites, as they have received a great deal of publicity for the many worthy causes that they have supported. While Kickstarter and sites like it raise funds for worthy causes, they don't involve a promise of a return. In other words, no equity or debt position is being offered by the "sponsor" to the capital provider for his/her "investment."

True crowdfunding involves an offering (i.e. a sale of a security) to the "crowd" (e.g. private investors), which includes both accredited and non-accredited investors. The addition of non-accredited investors is an important development, because until recently sponsors were only allowed to raise investment dollars (in the form of equity or debt) from accredited investors. U.S. federal law limited the universe of potential investors to those individuals with at least $1 million in assets, excluding the equity held in their primary residence, or $200,000 in annual (individual) income.

This new development, to include non-accredited investors, came about as a result of the JOBS Act (Jumpstart Our Business Startups) of 2012. The Securities and Exchange Commission has been extraordinarily slow to finalize the guidelines for this new program; as a result, many states, including North Carolina, have elected to enact crowdfunding laws to permit limited offerings to investors. On June 29, 2016, the North Carolina legislature passed the NC PACES Act (Providing Access to Capital for Entrepreneurs and Small Business Act), which allows non-accredited investors to invest in startup companies or businesses (including real estate partnerships) in the same way that accredited investors have been able to do so for years. Governor Pat McCrory signed the bill into law on July 22, 2016.

The new law does place a number of restrictions on the non-accredited investor. For example, the non-accredited investor is limited to a maximum of $5,000 per offering in any 12-month period, and all information on the offering circular must be filed with state and federal regulators. The offering must contain all of the relevant risk disclosures and certifications, and it must also define the business model for the investment, including financial targets and projected returns. Furthermore, companies will be limited to raising $1 million in any 12-month period from non-accredited investors – unless they are willing to have their financials audited annually and available to investors.

We at Avison Young believe that crowdfunding will play an important role in stimulating additional real estate investment in North Carolina. Individuals who have historically been shut out of opportunities to invest in real estate will embrace this new investment vehicle as they seek to diversify the impact of their limited investment dollars. For more detailed information on crowdfunding, please refer to “Crowdfunding Law Made Simple” on the North Carolina Business and Banking Law Blog or view the U.S. Securities and Exchange Commission news release dated November 30, 2015.

The above article is for informational and educational purposes only and should not be construed as professional, legal or financial advice.

(Gary Lyons is a Senior Vice-President, specializing in Capital Markets, in Avison Young’s Raleigh, North Carolina office.)

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