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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.)

Sunday, April 9, 2017

Calgary Stampede chuckwagon tarp auction an indicator of local business confidence

By Susan Thompson (Calgary)

While not a widely analyzed or recognized economic indicator, the annual Calgary Stampede tarp auction for the chuckwagon races is a solid indicator of business confidence in Calgary.

Chuckwagon racing is one of the most exciting events held annually at the Calgary Stampede, with teams vying for more than $1 million dollars in prize money. Every year, businesses bid on the opportunity to be a sponsor for, and have their logo displayed on, one of the chuckwagons participating in the GMC Rangeland Derby.

Because Calgary’s economy is so strongly tied to the world price of oil, WTI crude oil is one of the most tracked commodities locally. When WTI prices are high, the economy booms. When WTI prices are low, things slow down substantially. As a result, the total amount spent each year on chuckwagon sponsorship packages actually ends up tracking well for economic confidence in the Calgary market.






The monthly average WTI spot price was $30.32 per barrel in February 2016 and $37.55 per barrel in March 2016, while the spot price for February 2017 was $53.47 and $47.70 at close on March 23, 2017, the day of the auction. The total spent on the chuckwagon tarp auction for 2017 was approximately $2.4 million, a better result than the $2.3 million total for 2016 and the low of $1.7 million recorded in 2009.


While recovery remains a long way away, it would appear that thanks, in part, to the recent increase in oil prices, confidence is increasing in Calgary’s business community. It is hoped that this confidence can be maintained and strengthened in the months to come.

(Susan Thompson is the Research Manager in Avison Young’s Calgary office.)


Thursday, March 23, 2017

Quality tenant representation improves office leasing experience

By Ronan Pigott (Vancouver)

I recently felt compelled to write this post due to the fact that, on a very regular basis, I find myself explaining to people outside of the commercial real estate circle exactly what my colleagues and I do for our clients.

One of the most common misunderstandings is the comprehensiveness and value of a quality tenant- representation service. Fundamentally, tenant representation is based on attaining the optimum result for a tenant’s office lease. To do this, a tenant must have access to the most up-to-date market information, while also having the ability to leverage the right skill set to negotiate with the modern-day landlord.

In Metro Vancouver, as in most large North American cities, office buildings are owned and/or managed by large sophisticated private entities or institutional groups such as real estate investment trusts (REITs), insurance companies, or pension funds. Whether dealing with an existing tenant’s renewal or with a new tenant during a lease transaction, the landlord’s goal is always to maximize shareholder return.

To do this, prudent landlords will arm themselves with the tools required by way of expert representation and extensive market research. The obvious question: If a professional landlord is taking these necessary steps, why wouldn’t a tenant do the same?

What does comprehensive tenant representation include? Although site identification is fundamental, with the amount of information offered online through a multitude of websites, it doesn’t take a high level of skill or professionalism to prepare a list of potential locations. Exploring the market with the sole parameters being size and location rarely renders the optimum locations.  Two of the most common considerations that are often overlooked are ownership structure and the building’s tenant profile.

The modern landlord community consists of many different ownership types. What type of ownership is the right fit for you, the tenant? Let’s explore a hypothetical scenario. You identify an opportunity in an office building owned by a local investor with few commercial holdings. Although this particular landlord is one of the most diligent and reasonable landlords in the market, it doesn’t necessarily mean that this ownership type will be the best fit for you.

This is a big move for your organization and it is intended to be a long-term commitment. In order to make this premises work for your organization, extensive improvements and customizations must be made within the interior of the space at a considerable cost. It is often the case that this type of landlord, as opposed to a larger or institutional landlord, will be reluctant to contribute financially to a tenant’s specific build-out.

It is not necessarily the case of local investors being unreasonable – these landlords may simply not have the necessary access to capital. Should you wish to have a significant portion of your office improvements financed by a tenant improvement allowance, you may need to focus on an alternative building set where the overall deal structure will be a better fit for your specific situation.

Flexibility is, arguably, the most important factor when considering a long-term lease commitment. Growth and contraction plans are typically at the forefront of most progressive organizations’ business planning. At face value, one would think that the larger the building or complex, the greater the level of scalability, which offers the required flexibility. But it often soon becomes clear that it is not always the case.

The tenant profile within a building will dictate the flexibility of an incoming tenant’s tenancy. Many prospective tenants assume that a large building will automatically accommodate their expansion plans due to its size and many moving parts. Often overlooked are the many pre-negotiated rights that are likely scattered throughout the building by a number of existing tenants. These rights can dramatically change the perceived future flexibility available to incoming tenants. You may have the ability to negotiate terms on future expansion plans but, more importantly, where do you fit in the tenant lineup?

Comprehensive due diligence on the existing rights of all tenants within a building is essential – but often overlooked. Whether overlooked or not fully understood, the effects can be severe.

Looking at the tenant representation service on the surface, it is a three-step process in the order of strategy development, site identification and lease negotiations. A comprehensive service requires detailed analysis of each of these three steps. I gain the most amount of satisfaction watching the process unfold and our clients discover and understand the value of tenant representation – not only the value-added benefits from a financial standpoint, but the often tough-to-quantify value of time savings and stress mitigation.

This value enables our clients to do what they do best: Focus on their core business.


(Ronan Pigott is a Vice-President in the Vancouver office of Avison Young, specializing in office leasing. This blog post originally appeared as an article in the October 2016 edition of Western Investor, a Vancouver-based commercial real estate newspaper.)






Friday, March 10, 2017

Avison Young wins Canada’s Best Managed Companies award for sixth consecutive year

By Mark E. Rose (Toronto)

After competing against some of the nation’s top firms in all business sectors, we are thrilled to announce that Avison Young has been named one of Canada’s Best Managed Companies for the sixth consecutive year, and attained Gold Standard status for excellence in business performance for the third straight year.

This award is a testament to the success of our Principal-led ownership model and the dedication of our entire talented workforce. Ultimately, this award shows that our success is not only about high sales and transaction volumes, but also about treating people fairly, respecting the importance of their properties and goals, and giving back to the community.

This award also demonstrates that our company’s values, collaborative culture, client-centric approach, and dedication to sustainability are resonating not only in our industry but all business sectors. Although we have achieved widespread growth, we are still using a model that speaks to clients and top talent, and we are differentiating ourselves from all other commercial real estate service providers. We are grateful for this recognition and salute all new and repeat winners.

Deloitte/CIBC have officially announced the winners in MacLean’s magazine and Canadian Business www.canadianbusiness.com/bestmanaged

Canada’s Best Managed Companies is one of the country’s leading business awards programs recognizing Canadian-owned and managed companies for innovative, world-class business practices. Applicants are evaluated by an independent judging panel made up of judges from Deloitte, CIBC, Canadian Business, Smith School of Business and MacKay CEO Forums. www.bestmanagedcompanies.ca 

We couldn’t be more proud to have the opportunity to celebrate this award with our clients, partners and employees who help us grow every day.


Mark Rose is Chair and CEO of Avison Young

Monday, February 27, 2017

Implications of Proposed US Tax Changes and Protectionist Policies on Real Estate Industry

By Amy Erixon, Toronto

In April 2016 I wrote a blog entitled “Implications of Rising Protectionism on the Real Estate Industry”.  This post is a continuation of that discussion.  Sweeping changes are being proposed to US tax, immigration and trade policies with a stated goal of invigorating the US job market.  It is hard to say what programs and features will actually see the light of day when all is said and done, but we know for certain, there will be winners and losers, and that experiments have consequences.  

The most dramatic aspects of the current plan include a significant shift in tax burden from income to consumption taxes via border tariffs; a 100% investment deduction up front on plant and building investments; and third the limiting of interest deductions (other than home mortgages) to the amount of interest income.   All of these measures have considerable implications for US property markets whose equilibrium pricing has been shifted much higher thanks to central bank subsidized interest rates and the huge influx of foreign capital which reached $87.3 billion in 2015, up from less that $5 billion six years earlier.   KPMG notes in their June 2016 report on the House Republican proposed tax reform that "In addition to WTO compliance concerns...a move from an income tax to a consumption tax effectively could void the current network of US treaties."  This would obviously raise liquidity concerns.  The investment deduction change could dramatically affect a tenant's inclination to own vs. rent, and will likely spawn a flurry of financial products to transfer the tax savings benefits between parties.  We should not forget about the last time this was tried.  Repeal of accelerated depreciation rules in 1986 triggered a 7 year real estate crash, (and caused the savings and loan crisis) as financially engineered property investments, whose primary goal was to provide tax shelter, imploded.   

 HOW TARIFFS WORK
The claim of tax neutrality hinges on the expectation that revenues lost would be replenished by border tariffs.  For those of us who could use a refresher on tariffs:  Tariffs are taxes on imported goods and services, imposed by governments at the border, traditionally for two reasons: 1) to protest violations of standing trade agreements, 2) to temporarily protect domestic industries unable or unwilling to compete with foreign competition.   Tariffs restrict trade, and reduce overall economic activity by increasing price to consumers.   This chart illustrates how it works: units sold is on the “Y” axis and price is shown on the “x” axis.  Consumer behavior is shown in red, decreasing as prices rise.   Light green and light blue areas show redistribution effects of the tariff.  In this example, where consumer demand is tied to price, total economic activity is reduced by $50 million, domestic producers gain $50 million of sales, foreign producers lose $175 million, and the consumers pay $300 million in additional taxes to the government.   

The asymmetry of results is one reason why tariffs are universally unpopular and considered a tool of last resort.   For a more complete treatise on tariffs, follow this link to an article written by faculty at the University of Washington: https://faculty.washington.edu/danby/bls324/trade/tariff.html.  

Taxes are a domestic affair, and the congress will decide who will pay more and who will pay less, and in the process create winners and losers, but trade and deportations are another matter (and much more in the hands of the President).   In the past when mass deportation has been tried, the adverse effects have shown up most strongly in housing construction and agriculture, both of which industries are also highly reliant on interest deductions.   Businesses reliant on foreign workers (or an integrated supply chain) are forced to pivot into other pursuits where automation can replace human labor, or goods may be substituted until the time new factories and/or supply chains can be built - for example growing nuts vs fruits, or selling software instead of smart phones.  Most US businesses are affected by trade and tariffs will cause considerable dislocation both for these businesses and for their customers.  In addition to depressing economic activity and hurting consumers, trade wars, whether via tariffs or deportation are not unilateral.  They have a tendency to escalate into counterproductive parry and counter parry as relations between countries quickly deteriorate, and domestic security is undermined. 


The US tax code is unnecessarily complex and is widely considered to be unfair, reforms are needed.  And rethinking trade has gained considerable popularity in the most recent year, but consequences are far greater and less predictable.   Let’s hope that there is deep study and reflection of unintended consequences prior to implementation of some of these proposals and an adequate phase-in period is provided to allow property investors, tenant companies, retailers and distributors time needed to re-tool their operations.  

Amy Erixon is and Avison Young Principal and Managing Director Investments.  Amy is based in the Toronto headquarters office. 

The postings on this site are those of the bloggers and do not necessarily represent the views or opinions of Avison Young.