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Sunday, September 10, 2017

Strong demand lifts Calgary retail property values

By Kevin Morgans, Walsh Mannas and Ryan Swelin (Calgary)

Demand in Calgary’s retail real estate investment market continues to strengthen even as values approach all-time highs, capitalization rates compress and lease rates and occupancy levels remain strong.

Through large institutional-quality asset sales and small private-to-private transactions, Avison Young has been one of the most active groups in brokering retail asset transactions in the Calgary market.  This activity has kept us at the forefront of this trend line and allowed us to track the investment metrics changing quarter-over-quarter and almost week-over-week. The strong demand has led to multiple-bid scenarios, putting more upward pressure on property values as groups compete to control assets.  We have also seen interest come in from investors in Vancouver and Toronto as they pursue risk-adjusted returns not available to them in their home markets.

Since major enclosed malls and regional power centres rarely come to market, investors’ focus has been on strip centres along main thoroughfares and mature neighbourhood centres. The centres that have traded recently are all well-performing assets with multiple opportunities to increase returns through such value-add strategies as façade renovations, pad development, re-tenanting, long-term site redevelopment and/or densification.

One key factor in the upswing has been a consistent, record-breaking rise in Alberta’s monthly retail sales. As indicated in the graph below, sales have broken the previous record of $6.72 billion set in October 2014 every month this year (as of June 30) since March, with June sales reaching $7.15 billion. 

This is not to say that there is not pain being felt in Calgary’s retail market.  Downtown retail correlates directly to the strength of our office market, which still sits with a vacancy level at heights not seen in decades.  Restaurants and bars that once catered to the downtown crowd have been the most obvious casualties with a number of new entrants and landmarks closing their doors this year.

We predict that the remainder of 2017 will see retail real estate investors continue to chase well- positioned assets with more opportunistic buyers taking a serious look at downtown and inner-city opportunities to really try and add some value.

Kevin Morgans, Walsh Mannas and Ryan Swelin are Vice-Presidents in Avison Young‘s Calgary office and co-lead the capital markets group in Calgary.

Tuesday, August 29, 2017

Evolving trends and varying fundamentals challenge stakeholders to adapt

By Bill Argeropoulos (Toronto)

Trends prevalent in 2016 continued to play out in the first half of 2017 – and will likely shape Canada’s office market in the foreseeable future as the sector adjusts to the changing dynamics.

Evolving trends and varying fundamentals are challenging stakeholders to adapt more now than ever before – not just in Canada, but globally. On the Canadian front, the prevailing trends include urban intensification, transit-oriented development, consolidation, workplace design and millennials’ live-work-play preferences.

Though demand from traditional sectors has been patchy, technology and the co-working craze are transforming the marketplace, garnering an increasing share of the leasing pie. Co-working space providers have expanded rapidly due to the need to cater to startups, entrepreneurs and the increasing demand for affordable workplaces on flexible lease terms. Notably, U.S.-based WeWork has leased big blocks of space in Vancouver and Toronto after opening its first Canadian location in Montreal in 2016. Meanwhile, e-commerce is another ubiquitous driver, prompting firms such as Amazon (in Toronto) and home-grown Shopify (in Toronto and Ottawa) to grow their real estate footprints.

Traditionally having occupied funky, older premises or brick-and-beam product on the fringes of major urban cores, this sector is now seeking a larger presence in major towers, primarily in the country’s downtown markets. These trends will challenge owners and occupiers to adapt to evolving circumstances and varying fundamentals in markets from coast to coast.

Notable Mid-Year 2017 Canadian Office Market Highlights....

(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.)

Thursday, August 24, 2017

Atlanta’s BeltLine serves as model for other cities

By Nadine Melo (Atlanta)

One wouldn’t usually equate parks and cultural activities with real estate investment, but Atlanta has been setting the pace for what that correlation looks like.

Since 2005, Atlanta BeltLine Inc. has used the manifesto created in Ryan Gravel’s 1999 Georgia Tech master’s thesis on architecture and city planning to put into practice a sustainable redevelopment project that will connect 45 local neighborhoods via a 22-mile loop of multi-use trails and parks.

The project, aptly named the BeltLine, stems from the idea of new urbanism, which takes a human-centric focus when it comes to designing and planning urban areas. New urbanism takes into consideration land use, transportation, and urban form to create communities that encourage sustainability, a sense of place, economic progress and historical preservation.

Since the BeltLine’s inception, more than $3.7 billion of new and private development has been generated within a half mile of it. The project has also created an influx of approximately $450 million of public and private dollars into the creation of infrastructure that helps connect Atlanta’s inner neighborhoods.  

In particular, the area of Inman Park has seen demand for creative office space as companies flock to the area to attract and appeal to the next up-and-coming workforce, millennials. As much as we hate the dreaded M-word, the fact of the matter is that millennials are impacting the real estate industry by forcing companies to not only change how they work, but also where they work.

Urban developments like the BeltLine are attractive to Millennials because it appeals to their sense of work-life balance and the market is responding to that demand. This trend is best evidenced by the Jamestown award-winning Ponce City Market project, which redeveloped a former Sears regional distribution center into a 2.1 million-sf mixed-use project featuring specialty retailers, office spaces, restaurants, and apartments – all while sitting parallel to the BeltLine.

Additionally, the project has spurred other development activities, such as the redevelopment of a new Kroger grocery store that will feature 360,000 sf of office space on a lot adjacent to the BeltLine. In fact, the influence of the BeltLine has managed to reach the suburbs, which aim to replicate the same type of growth and development that the project has initiated within Atlanta’s city limits.

The BeltLine’s success has enabled Atlanta to act as an incubator for these types of projects and a model for other cities to follow. For example, in Alabama, the City of Birmingham recently opened Railroad Park in 2010 and Rotary Trail in 2016. These projects borrow from the BeltLine concept of repurposing an old railroad bed in Magic City’s downtown area into a walkable space that connects two of the city’s major historical attractions while providing outdoor amenities for people to enjoy.

So what is it about these types of urban developments that make them so lucrative for the real estate industry? Redevelopment projects like the BeltLine help provide value to a city, making it easier for us in the real estate industry to sell, lease or manage space. They also help create a healthy economic environment that is sure to attract – and please – investors.

If you would like more information on where the BeltLine is heading next and the development projects following suit, check out for more information.

(Nadine Melo is a Marketing Co-ordinator based in Avison Young’s Atlanta office. She works closely with the Atlanta office’s capital markets group.)

Tuesday, August 22, 2017

Office sector undergoing important shift in dynamics as trends transform both demand and supply

By Mark E. Rose (Toronto)

Amid varying economic performances and property fundamentals, North American and European office leasing markets are generally performing well as they undergo an important shift in dynamics influenced by trends transforming both occupier demand and the supply of new product. Traditional drivers of demand are being joined by emerging disruptors that will increasingly shape the future of the office-space market and commercial real estate as a whole.

These are some of the key trends noted in Avison Young’s Mid-Year 2017 North America and Europe Office Market Report:

The office sector and commercial real estate, in general, are not immune to the effects of globalization and technological innovation. The world is transitioning into a more distributed, automated and digital economy, which impacts how occupiers conduct business and think about their workplaces, and this transition may have profound implications on the role and intrinsic value of property. In turn, owners and developers are finding ways to adapt and provide flexible work environments that meet these changing requirements.

Rapid change has given rise to the idea that technological advances could render physical real estate increasingly obsolete. However, historical evidence suggests that technology is just as likely to create new jobs as to displace them. For example, the likes of Amazon and WeWork are among the occupiers that feature most frequently in our report’s survey of the largest lease transactions across Avison Young markets.

Amazon’s success in the digital realm is translating into increasing demand for physical space – not only in the retail arena, but also the industrial and, now, office sectors, pointing to a new driver of demand in the office market as the e-commerce industry continues to grow. Meanwhile, the growth of WeWork and other providers of co-working and space-sharing services demonstrates that business will still require physical workplaces, even as we move toward an interconnected world offering anywhere-anytime access to skills on demand.

With Canada and the U.S. intertwined by close economic ties, the aforementioned disruptive trends continue to shape the Canadian and U.S. office markets, while in Mexico City, oversupply has led to the postponement of some new construction projects. Turning to Europe, the U.K. market is in flux one year on from the Brexit vote; Germany’s markets are reporting strong performances with declining vacancy rates year-over-year; and in Romania, the newest country on the Avison Young map, solid results in Bucharest have been driven by the information-technology and communications sector.

According to the report, of the 64 office markets tracked by Avison Young in North America and Europe, which comprise almost 6 billion square feet, market-wide vacancy rates decreased in 40 of the markets as nearly 52 million square feet (msf) was absorbed on an annualized basis.

Occupiers’ desire for new product remains strong and the development community has responded, as more than 62 msf of office space was completed during the 12-month period ending June 30, 2017. Meanwhile, another 134 msf was under construction at mid-year 2017 – with 50% of the space preleased. 

(Mark Rose is Chair and CEO of Avison Young.)

Monday, August 14, 2017

The State of the Houston Office Market

By Rand Stephens (Houston)

During my 30 years in the Houston commercial real estate industry, I have experienced several major economic downturns. Surprisingly, the latest slowdown (I say slowdown because Houston never experienced negative job growth) has not packed the punch of the economic implosion during the 80’s. Although Houston’s economy seems to be on the upswing, as it has developed a vibrant, diversified economy beyond oil and gas exploration, I remain cautiously optimistic. The slowdown began in Q3 2014, and ended Q2 2016. During that time, oil prices declined from $100/bbl to $35/bbl. Since last year, Houston’s job growth is back on track with 56,000 new jobs reported for the trailing 12 months.

During the slowdown, the housing, retail, and industrial markets remained very strong, but the office and multi-family markets took a hit because of overdevelopment. Multi-family now seems poised for a recovery, due to very little new construction over the last few years combined with sustained population growth and improved job growth.

The office market is the one sector where a recovery will take longer. Although, we’re seeing small signs of improvement, there is still a lot of vacancy. And, with 11 million square feet of sublease space available, as these leases expire, this shadow inventory may have the effect of pouring gasoline onto the fire.

The Energy Corridor (west Houston) and the Greenspoint submarkets have been hit hardest. The office inventory in west Houston increased dramatically from 2010-14. Fortunately, the new construction was responsibly financed with significant investor equity and pre-leasing with credit-worthy companies to give owners “staying power”. However, it looks like many of the energy companies leased a lot of space for future growth. So, not only do these companies not need the future expansion space, but much of the existing space they were occupying is also unnecessary.

From 2010 to 2014, offshore exploration drove much of the office development. Therefore, without a rebound in this part of the industry, it’s hard to see any quick turnaround in the office market, particularly in west Houston. Fortunately, the overall Houston economy is solid and will help to whittle away at the significant surplus of office space.

Click here for a full update on the Houston office market.

(Rand Stephens is a Principal of Avison Young and Managing Director of the company’s Houston office.)

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