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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 Kickstarter.com or Indiegogo.com 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.)

Tuesday, August 16, 2016

Macy’s to close 100 stores: Is the department store dying?

By Beverly Keith (Raleigh, NC)

With last week’s announcement from Macy’s that the company will close 100, or 15%, of its 675 stores in the first quarter of 2017, the commercial real estate industry and consumers are questioning whether the department store is dying.

On the heels of other 2016 announced closures by Walmart, Kmart, Sears, J.C. Penney and Bon-Ton, the Macy’s decision may be cause for real concern.

Dillard’s, J.C. Penney, Nordstrom and Kohl’s have all experienced declining revenue for six straight quarters. Furthermore, all have announced store closures and/or delays of expansion plans. Continuing missed revenue targets are also impacting REITs, such as General Growth Properties (GGP), Kimco Realty Corp (KIM) and Simon Property Group (SPG), which own many of Amerca’s malls, as they realize the impact of lagging retail sales on their slumping unit prices.

A question of relevance

Are department stores relevant in today’s retail environment? Specialty retailers consistently outperform department stores by offering a better merchandise mix, better prices, better shopping experiences and much better customer service. Moreover, specialty retailers owe their success largely to sales of mixed apparel, which represents department stores’ core product and majority of merchandise. Apparel has become a highly competitive category as more and more discounters also gain significant market share.

For stand-alone department stores in primary and secondary retail markets, the question becomes: What is the overall value of this site? The store-closure decision becomes much easier when redevelopment of the site yields a higher return on investment, or if a sell-off of the asset provides a significant cash infusion to a corporation’s bottom line.      

Anchors away?

With department stores being anchor tenants in virtually every enclosed mall, what should REITs and other owners do? Many mall owners and observers are asking whether department stores can transform to meet ever-changing consumer demands. Shoppers want an integrated retail shopping experience – a connection between the typical in-store experience and the information gained from online research. Shoppers are also experiencing a time crunch like never before.  Shopping in 2016 is a lot more purposeful and, therefore, involves a lot less browsing, because shoppers just don’t have the time. In-store purchase opportunities must provide the same ease as an online shopping experience and validate the choices shoppers made in researching items. Retailers must also ensure that products available online are in stock when customers physically walk into bricks-and-mortar stores.    
 
Department stores have been very slow to adapt to, and meet, increasing consumer demand for updated and remodeled physical stores that reflect evolving brands; embrace omni-channel retailing; offer e-commerce; and fulfill the increasing need for instant gratification. For example, Amazon Prime’s RaaS (retail as a service), providing same day or next day delivery, includes drone dropship to satisfy shopper’s need for instant gratification or what is being called immediate retail gratification. If past performance is the best indicator of future performance, mall landlords may need to revise their strategic plans and look for ways to backfill anchor spaces.

Malls repositioning themselves

But does the demise of the department store only spell bad news for the consumer? Maybe not. Malls all across America are repositioning themselves. Whereas once there were four anchor stores in an enclosed mall, you may now start to see only one. The large blocks of space traditionally reserved for department stores are being backfilled with more shopping experiences – primarily restaurants, expanded food courts, movie theaters and concert venues – which offer an assortment of leisure activities and social interaction in addition to shopping.

These changes support the ever-changing consumer shopping paradigm shift by building a better shopping experience – a trend which is a huge plus for the future of retail.

(Beverly Keith is a Senior Vice President, specializing in retail real estate brokerage, based in Avison Young’s Raleigh, NC office.)

Tuesday, August 9, 2016

Berlin after Brexit: Still at the Top of the List

By Nicolai Baumann (Berlin) and Inga Schwarz (Hamburg)

With or without Brexit, Berlin remains at the top of national and international investors‘ list of commercial real estate investment markets.

Most, or all, foreign investors have kept Germany’s capital in their focus for a number of years now. They love the Berlin success story of the recent past. They are fascinated by Berlin’s urbanity, its international character and its dynamic marketplace. They are attracted by the possibilities that the city offers to its residents, visitors and the economy. They see change, creativity and the citywide desire to discover and try new things.

And the figures speak for themselves. Berlin’s population rose by almost 6% in the past five years. Currently, some 3.52 million people live in Berlin, and official forecasts predict an additional rise of 266,000 by the year 2030. Furthermore, Berlin is Germany‘s No.1 tourist destination. In 2015, a record 30 million overnight stays were tabulated in Berlin, and that number is also on the rise. Last but not least, Berlin is Germany’s start-up capital. In 2015 more than 42,000 new enterprises were registered, equating to 121 start-up companies per 10,000 residents or more than 115 registrations per day. This level is unmatched anywhere in Germany.

Accordingly, Berlin’s international character is highly attractive to young people and enterprises seeking to move from the U.K. to an EU country following the Brexit referendum.

Although Berlin’s residential rents have risen noticeably over the past few years, the overall rent level remains comparativiely low. Moreover, the academic landscape, with some 175,000 students, is an important pillar for further economic growth, as are the low office and location costs in comparison with international markets. A high quality of life and a vibrant cultural scene, which is second to none in Germany, complete the overall package. Young urban hipsters and millenials from across the globe have been drawn to Berlin for a number of years now, making English a language spoken in almost any local supermarket.

Pull factors that draw investors to Berlin: The city and its economy are growing, the standard of living is high and the local real estate markets only know one direction – up.

Take-up in the Berlin office market reached a historical high of 9.15 million square feet (msf) in 2015; and with 4.41 msf of office space taken up in the first half of 2016, the capital’s office market is on course for a strong second half. Meanwhile, the office vacancy rate is currently at 3.9% and will decrease further. Why? Berlin is in demand and we are in a landlord’s market these days. This trend is underpinned by the rise of class A central business district (CBD) office rents. They are currently at €26,00 per sq. m per month and will continue to increase, as there is continuing demand and no rise in supply in sight. The residential, retail, industrial and hotel sectors are growing in similar ways. Therefore, it should come as no surprise that, backed by strong leasing markets, Berlin’s commercial real estate investment sector has been on a high lately. In 2015, record investment volume of €8.2 billion was achieved. Foreign investors contributed more than € 4 billion of that total, representing a 49% market share. In the first half of 2016, foreign investors increased their market share to 60%.

Simply put, international investors love Berlin. While they have the entire German market and all of its possibilities and stability in their scope, Berlin will remain the top investment target. As the U.K. and EU work out the terms of Brexit, demand for investment product will rise further – across all real estate asset classes. With class A supply limited and becoming even tighter, investors will need to raise their visors to avoid missing out on opportunities.  Developable assets located outside the CBD will come into focus, and investors‘ appetite for development projects will increase further across all of the region‘s commercial real estate sectors.

Nicolai Baumann is Avison Young’s Head of Office Leasing in Berlin
Inga Schwarz is Head of Research Germany with Avison Young 

Friday, July 8, 2016

Technological Disruption and the Real Estate Industry

By Amy Erixon, Toronto

Many forces are combining to cause 2016 to be the year where even the most skeptical of observers is beginning to wonder, all this technological change – what do you suppose it means to me and the way I do my job?   For example, most real estate industry executives have tried Uber or Lyft and wondered, will there be companies in the business of renting space that aren’t actually landlords?  The answer is yes, and there are several.  

Perhaps you have read about or seen an office where the workforce needs to reserve a spot to work at their regular office location, via a mobile app (for example:  Deloitte’s newest offices).  These types of digital applications have the potential to disrupt not only the way physical space is being utilized but the resulting work outcome and processes by which we undertake the work - in ways we haven’t yet conceived. 



Robotics is another field that has revolutionized manufacturing and more recently legal and journalistic research.  Are you aware of how it has disrupted logistics and is poised to disrupt the construction industry?  Likewise, revolutionary high performance materials and artificially intelligent operating systems are being utilized to substantially improve environmental performance of the newest state-of-the art projects to save occupants 50% or more on their electric bills – material in jurisdictions like Ontario where power costs are 2.5 times the North American average price.  

We have entered into an era known as the Fourth Industrial Revolution where cyber physical systems, streaming technologies, online marketplaces and artificial intelligence among other innovations are supplanting the way things used to get done.  Our infrastructure investment is lagging at the same time that the merger of scientific research and engineering applications are pushing the boundaries of what kinds of buildings and places of the future are conceivable.  All of these changes are ushering an era of great opportunity for those quick to notice the patterns and embrace new technologies. 

If you would like to learn more about a sampling of these technologies and major themes at work, I invite you to read my recent Topical Report which can be found at https://avisonyoung.uberflip.com/i/684513-aytopicalreport-techdisruption-june8-16final.

Wednesday, June 29, 2016

BREXIT: Finding clarity in murky waters

By Mark Rose (Toronto)

I was in London on June 23, the day the British voted to leave the European Union, when my taxi driver confessed: “I don’t know why I voted to Leave, but I wanted to vote for my country.” His remarks summed up the mood behind the “Brexit” vote that seems to have caught markets, politicians, business leaders and even much of the public so off guard. In just the past few days, we have seen a dizzying array of dire reactions in the U.K., Europe and across the globe, including dramatic plunge of the pound sterling and trillions of dollars in global stock market losses.

This short-term disruption is the natural effect of fear of the unknown. The market chaos that we are witnessing is due to people not knowing what leaving the EU will mean. The day after the vote, CNN reported that the most Googled search in the UK was- “What is the EU?” Visibility is low, and it is difficult to discern the guideposts, much less the horizon. While this situation is understandable, we at Avison Young cannot emphasize too strongly that no one knows how the U.K. vote to Leave will play out. A complex series of political and economic negotiations will need to be navigated over a long period of time before clarity is restored.

Yet, disruption is always a time of opportunity as well as a time of risk. Smart money will pause, assess – and then formulate new strategies. Brexit is not the death of the U.K. or Europe, and it is not the death of real estate investment, either. Our industry will bounce along as negotiations and rhetoric between the U.K. and the EU start, but global commerce is alive and well – and the U.K. is a big part of it. We may or may not be in the midst of a long-term trend, but business does not cease for long periods.

From a commercial real estate perspective, in the short term, we expect the bid-ask spread to increase as buyers and sellers jockey for position with very different views on value. This trend will lead to a slower investment pace and lower volume of transactions – although we would not be surprised to see a few large, bold transactions from smart-money investors. Similarly, for leasing, most multinationals will pause to assess the situation and chart a new course. We anticipate a slower pace and lower volumes among occupiers as well as investors in the short term.

The U.S. dollar is the big beneficiary and, thus, makes North American investment in the U.K. and continental Europe enticing as events stabilize. Europe is effectively on sale to North American investors due to currency losses. Previously unavailable opportunities may suddenly open up.

North America will continue to represent the best port in the storm. Core markets in the U.S. and Canada, in particular, become safe havens for commercial real estate investors, and New York, Toronto, San Francisco, Vancouver and Los Angeles could be a huge beneficiaries. The U.S. has largely been the world's core market over the past 24 to 36 months, with the most aggressive investors making acquisitions for capital preservation as much as for yield. The Brexit vote aftershock will amplify that situation, and we will see more markets and assets that are not traditionally viewed as core – but increasingly exhibit core characteristics – begin to trade as such. Expect the research-driven core funds to lead the way followed by separate accounts and offshore funds. In major markets, smaller assets that have the right characteristics will see pricing previously reserved for larger properties, due to lack of investable assets on the market.
The interest-rate environment, which was beginning to see signs of uptick, will remain stable to down over the next two years, possibly even the next three to five years – another ultimately positive factor for real estate investment. Brexit has clearly impacted interest rates and may have dealt a death blow to central banks interested in raising rates any time soon. Real estate as an alternate investment just became that much stronger.
Some short-term trends may promote investment opportunities; however, over the longer term, it will be wise to take the time to assess the strategic factors in play. It is simply not known yet how tariffs, import-export regulations, security agreements and movement of labor will be affected. The political and legal decisions that will shape the new relationship between the U.K. and Europe are, at this stage, opaque.
Europe’s broader political landscape will make exit negotiations quite challenging. Upcoming elections in Spain, France and Germany are bound to exert pressure on European negotiators, and some member countries will be in a hurry to be, or at least look, punitive. It is not unthinkable that Russia might make another move to test the nerve of the West.

On the home front, the U.K. has more than its fair share of homegrown problems. Scottish and Northern Irish voters, who strongly voted to Remain, are now rethinking their own alignment strategies. While the British economy has breadth and depth, according to The Economist, Britain sends more than 40% of its exports to Europe, while the EU sends only 7% of its exports to the UK.  Accordingly, Britain’s massive trade imbalance leaves it highly vulnerable to trade disputes.

Our advice to clients is to proceed with caution. History points to downward trends in the short term and a recovery in the medium term, but anyone who claims to know the details or the exact outcome over the long term is foolish. Brexit will play out in real time before us. The ending to this story is unknown.

With that said – although the emotions of this vote are high, the decline in markets around the world steep and the landscape one of uncertainty – capital flows have always found investable assets, and those who take advantage of the downturn will profit. Commercial real estate investment fundamentals remain very strong. At Avison Young, we encourage our clients to assess their situations carefully and develop a plan. Take time to pause and assess, seek out our experts. One thing is for sure- smart money has always taken advantage of disruptions in the marketplace.  

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


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