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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.)

Sunday, August 6, 2017

Next downtown Vancouver, BC office development cycle facing headwinds

By Andrew Petrozzi (Vancouver)

While downtown Vancouver’s recent office development cycle, which will result in more than 2.1 million square feet of new space added to the core between 2015 and 2017, has been largely deemed a success, a number of new actors and trends in 2017 may offer challenges to the next wave of office development preparing to break ground.  

Though downtown office vacancy did rise – peaking at 9.8% at mid-year 2015 – as new buildings were delivered, dire predictions that vacancy could spike to levels last recorded in the early 2000s when downtown vacancy hit 13.5% failed to materialize. Nor did a tsunami of sublease space wash out the downtown market by weakening asking rates and contributing to vacancy in its wake. The vast majority of space in new buildings was leased and resulting sublease space subsequently absorbed through existing tenant expansions and businesses locating in the core.

Although tech firms have been largely credited with the successful lease-up of this recent wave of developmentand certainly Amazon, Microsoft, Sony Pictures Imageworks and others played a substantial role – it is also important to note the significant contribution made by local legal, finance and accounting firms as well as engineering companies.

The first wave of development successfully tapped most of the expansion demands (and a desire for ‘cool’ updated premises) from these stalwarts of the downtown office market and the growing clout of the city’s tech cluster that had built up over a decade, in which the downtown market only recorded the addition of the 540,000-sf Bentall 5 office tower in 2007 (in two phases nonetheless!). A majority of the city’s lawyers, accountants, engineers, bankers and software engineers have moved into new digs since 2015. The next wave of development, which could start delivering new buildings by late 2019 and would continue to 2021, will not be able to count on this pent-up demand to drive their leasing programs.

The arrival of co-working juggernaut, WeWork, to Downtown Vancouver’s office market in early 2017 may have a potentially disruptive impact on the traditional relationship between tenants and landlords, particularly with technology firms (which are touted as the source of much of the future demand for new office space in Vancouver). Regus’ co-working format, Spaces, also opened in Vancouver this year. The fundamental rethinking of the tenant-landlord relationship represented by these new players may reduce demand for space in the next development wave. Whether or not the appetites of a WeWork or Spaces to take on more space in these new buildings outweighs a potential reduction in demand from firms that choose to go the co-working route remains to be seen.

The scale of construction proposed in the second wave of development, which already includes more than half a dozen buildings totalling almost 1.5 msf and counting, will be much more reliant on demand originating from outside the local market. While many Vancouver-based businesses, tech and otherwise, continue to grow and will require additional space, the magnitude of the office development being proposed exceeds the likely requirements generated by local firms, many of whom already expanded or relocated since 2015.

While ongoing concerns with immigration policy under the current U.S. administration may lead some American firms (particularly tech companies) to open offices in Vancouver to recruit talent from around the globe and avoid U.S. visa restrictions, the nature of these operations has a transient quality that may be unwise to base a development cycle upon. A rising Canadian dollar and an end in sight to nearly a decade of easy money will also be factors that need to be considered and which were largely absent during the first wave of new development. While the success of the recent wave of downtown office development may not be easily replicated, the next wave will represent a true step forward in the city’s evolution and its establishment as a truly global tech hub, but first steps are never easy or simple.    

(Andrew Petrozzi is Principal and Vice President Research in Avison Young's Vancouver office.)

Tuesday, July 18, 2017

Seismic structural shift in the office market isn't coming, it's here...

By Rand Stephens (Houston)

PropertyWeek.com recently posted a very interesting article about a shift in how companies want to use office space and the impact that may have on the asset class.

I believe this article is spot on from what we’re seeing in the marketplace. However, the Seismic shift isn’t about to happen… it’s happening as I post this blog.

The phenomenon that’s occurring is that more and more large corporations want short lease terms (less than 5 years) to provide themselves flexibility in an ever changing business environment. In the past, the cultural need for private dedicated offices for employees required sizable investment in tenant finish by landlords which in turn created the need for a long lease term in order for the landlord to amortize that cost. That culture has changed due to constantly improving technology which allows people to work anywhere anytime. Consequently, employees are willing to give up their private office in exchange for improved lifestyles with less commute times and improved family time, or “me time”.

That’s a big cultural shift, and corporations are willing to accommodate their employees if it also improves their bottom-line; and, that has been happening by corporations being able to use significantly less square footage per employee. Now big companies are also seeing value in short lease terms because they potentially rid themselves of the huge cost of carrying unused space.

Companies like LiquidSpace, WeWork and TechSpace have arisen overnight in a new real estate service line to satisfy corporate America’s rapidly growing desire for flexibility (read the article to learn more).

For smart landlords who work with this new service line, this shift to short lease terms will create opportunity. In addition to the benefits discussed in the article, a bigger benefit will be improved cash flow since landlords won’t have to incur huge tenant finish costs. The tenant’s workplace design will be done with furniture to create private areas, public areas and collaborative areas and the landlord will have to provide a simple open floor plan reducing the need for the high cost of tenant finish which currently eats up the investors’ cash flow.

Special thanks to Amy Erixon, Principal and Managing Director of Avison Young Investments, who tuned me onto this article and keeps our company up to date on breaking technological trends. Be sure to read her most recent white paper, Architecture of the Fourth Industrial Revolution: Distributed Networks and Artificial Intelligence – Impacts and Opportunities for the Real Estate Sector.

(Rand Stephens is Managing Director of Avison Young's Houston Office.)

Thursday, June 22, 2017

Interface Carolinas event provides interesting takeaways

By Beverly Keith (Raleigh, NC)

On June 1, I was pleased to attend and participate in the eighth annual InterFace Carolinas commercial real estate event produced by France Media.

The event attracted more than 250 participants, who listened to six panels of exceptionally informed commercial real estate experts discuss the state of the market across North Carolina and South Carolina.   Mark Vitner, Managing Director and Senior Economist at Wells Fargo, was the keynote speaker and presented a top-down view of current economic trends in the Carolinas.  A few interesting takeaways included:

  • ·         Employment statistics as reported by the U.S. government can be misleading. The government counts anyone employed for only one hour in the last 30- day period as employed;
  • ·         The significant economic impact of the HB2 law’s enactment and repeal will most likely not be fully realized for another two or three years; and 
  •            Vitner forecasted GDP growth in 2017 at 2.5%, not the 3.5% that the federal government is predicting.

Additional topics covered included the state of the market, capital markets and trends in the office, industrial, retail and multi-family markets.  Not only were the speakers well informed and actively involved in their designated segments, but the networking between panel discussions was exceptional.

On the heels of ICSC ReCon, which was held in May, the retail panel included David Kelly, CIO of Wheeler REIT; Matt Klump, Vice-President of Acquisitions for RCG Ventures; Jimmy Penman, Director of Leasing at Lat Purser & Associates, Drew Gorman SVP, Acquisitions & Development at ECHO Realty, and me.

The retail topic was grocery wars and how the influx of so many new grocers is fragmenting and disrupting business as usual in the Carolinas.  With everyone agreed that Wegman’s entry to the market is a game changer, there was significant discussion on which grocers may grow their market share, establish a foothold or lose market share.  The consensus is that, while the Carolinas continue to add population at an extremely fast clip, the grocer market cannot support so many grocery choices in the market.  Some will win and some will lose, but don’t count out the homegrown favorites of Harris Teeter and Food Lion, each of which has reinforced its brand with significant upgrades and, in some cases, new stores.  Shoppers are finicky; they’ll try the new player just to return to the tried and true.

I’d like to extend a special thank you to France Media’s Associate Publisher Ryan Nixon for his leadership in organizing this exceptional event. And thank you to the North Carolina chapter of CCIM for its diamond sponsorship and Avison Young for its silver sponsorship.


(Beverly Keith is a Senior Vice-President of Retail Services based in Avison Young’s Raleigh office.)

Thursday, June 1, 2017

Understanding the role of demographic data in commercial real estate

By Kieran Smith (Vancouver)

For the first time in its 150-year history, Canada has more seniors aged 65 and over than children under the age of 15.

Federal 2016 census data released in early May shows that seniors now account for a larger piece of the population (16.9%) than children 14 years old and under (16.6%). Meanwhile, younger demographics – especially millennials – are disrupting traditional ways of doing business and engaging in leisure activities.

These developments are not exactly surprising – but they will shape our nation for decades to come.

The question now is: As government policy makers adapt to the changes, how will the commercial real estate community react?

Census data identifies interesting trends

It is hard to predict the future but strategic census and demographic data analysis can be used to enhance the transaction process.

Federal 2016 census data, recently released in May 2017, has identified some interesting trends. Demographics are changing broadly as baby boomers reach retirement age and the younger age cohort decreases in size.

Simply put, Canadians are living longer, becoming increasingly urban and shifting away from the single-family home. Therefore, housing-related issues are receiving considerable public attention.

The federal population and household data released in February 2017 received an extensive amount of media coverage in Vancouver, particularly because the information relates to housing affordability. The coverage tended to focus on areas where populations are shrinking and identifying municipalities with large numbers of unoccupied dwellings – particularly in certain transit-oriented development areas of Metro Vancouver. Whilst these issues are related to residential real estate, there is an associated relationship with commercial real estate.

Recent government policy changes in Vancouver (and BC) have been implemented to assist housing affordability for locals. The lack of affordability and focus on empty dwellings contributed to new tax rules – a 15% foreign buyers tax (2016) and a 1% vacant home tax (introduced this year). Its knock-on effect will play out over the next few years. And although these changes are aimed at residential real estate (the 15% tax doesn’t apply to commercial property), there is uncertainty over what the effect of this tax would be from a commercial perspective, from suggestions that commercial investors will be put off, or that speculators will redirect investments from residential to commercial properties. It’s still too early to draw conclusions.

Data analysis can enhance transaction process

The demographic changes highlighted by the census will influence real estate in the years ahead because long-term planning and policy decisions are based on what the aforementioned types of data show. As such, the use of census and demographic information can enhance the transaction process. First of all, data analysis can provide insight that increases the value proposition. Secondly, the statistics can help validate a broker’s local knowledge.

Getting back to our aging population, governments (local and federal) will have to put increased resources into meeting the needs of an older population. From a commercial real estate perspective, this scenario might result in a greater need for residences, hospitals and care facilities, leisure centres and retail properties that cater to seniors. Personal services and senior-specific businesses are also likely to grow.

Seniors will be less inclined to commute to local services and amenities, preferring instead to reside in higher-density residential areas. This scenario could lead to an increase in senior-specific multi-family residences that cater to empty nesters, who are increasingly downsizing from single-family homes. These changes could affect brokers – and clients – across many sectors, including multi-family, investment, office and retail.

We also need to interpret the census data to know where these changes are happening at the local level. For example, proportionally more investment in services for seniors is likely to be required in BC and Atlantic Canada compared to Alberta, where there is a high discrepancy between the proportion of population aged 65 and older.

Incorporating broader demographic and lifestyle changes

Despite the headlines generated by the census data regarding older Canadians, younger generations have also driven change to our lives and lifestyles. Millennials’ non-traditional attitudes are evident in their preferences to live in central locations versus outlying areas, rent rather than own their homes, and reside near public transit in order to reduce their dependence on automobiles. These recent trends, driven in combination with technology and millennials’ non-traditional attitudes, have begun to influence real estate, both residential and commercial. Increased urbanization, revised lifestyle preferences, the growth of disruptive services such as online retail and Uber are just some ways in which things are changing. Shared office space is gaining ground within the office commercial sector.

Whilst millennial-related stories often generate continued media interest, census data are clearly important when it comes to understanding local market demographics. By using the data wisely, brokers will broaden their market knowledge and, ultimately, clients will remain highly confident throughout the transaction process.

Results of the 2016 Canada Census are being released throughout 2017 and can be accessed at Statistics Canada’s website (http://www12.statcan.gc.ca/census-recensement/index-eng.cfm).


(Kieran Smith is the Director of Geographic Information Systems (GIS) for Avison Young’s Vancouver office, where he assists brokers and clients with data analysis, demographics and mapping requirements related to transactions.)

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