Thursday, December 15, 2011
Federal Leasing Activity Outside the Beltway in Northern Virginia
by Dan Gonzalez
Of all of the reshuffling of federal operations outside the Washington Beltway in Northern Virginia, the Springfield submarket has been and will continue to be a major beneficiary of the changes, due in large part to the Base Realignment and Closure Act (BRAC) and other relocations. Aligned federal and defense contractors are helping to revamp and bolster the Springfield submarket for the foreseeable future.
The National Geospatial Intelligence Agency (NGA) is moving to a new 2.4-million-square-foot operation in Springfield. A staff of about 8,500, both federal employees and contractors, will relocate there. And, the Missile Defense Agency headquarters command is relocating to Fort Belvoir, along with other army and defense programs. In anticipation of leasing demand by affiliated defense contractors, Corporate Office Properties Trust (COPT) has begun construction on 7770 Backlick Road, a 240,000-square-foot building adjacent to NGA’s new facility.
Major federal leases signed in 2011 in Northern Virginia outside the Beltway include:
• The FBI leasing 182,035 square feet at Mission Ridge in Chantilly. The Bureau is consolidating several locations and expanding its cyber-security operations; and
• The Defense Logistics Agency leasing 70,056 square feet at 8111 Gatehouse Road, Falls Church.
A major loss to the Northern Virginia outside the Beltway market was the Defense Information Agency (DIA) vacating 395,800 square feet at 5275 Leesburg Pike for a move to Fort Meade, Md.
Overall, there is still a great deal of uncertainty about leasing activity relating to federal users and government contractors for outside the Beltway facilities, which is attributed to predicted defense cutbacks and the political stalemate and gridlock in Washington.
Monday, December 5, 2011
By Mark E. Rose (Toronto)
The holiday season is upon us and both Canadian and U.S. Thanksgiving have recently passed. Time moves so quickly for all of us, but we need to take time to reflect and thank those who support us and have made Avison Young the fastest-growing real estate services firm in North America.
Of course, this starts with our clients. Our client list has grown significantly over the past three years as occupiers and investors become aware of our industry-leading client-service model. Avison Young boasts the only holistic approach to solving clients’ needs, and we surround the client's objectives with accountable individuals who face reputational as well as financial risk in the pursuit of service excellence. Our Principal-led culture ensures that the client, the execution team and the shareholders are completely aligned. We do not employ the age-old pyramid structure, where business units report up through layers of managers and are pitted against each other to deliver for shareholders who are not involved in the day-to-day business.
We would be here all day if we thanked every existing and new client earned in 2011, but we can promise that their trust is truly appreciated and will be rewarded through the custom solutions created and delivered by our Avison Young family. Our clients are our lifeline and our most important stakeholders. As recent as last week, the Healthcare of Ontario Pension Plan (HOOPP) entrusted Avison Young with the listing contract to lease HOOPP’s $300-million-plus, 33-acre development (up to 1.1 million square feet of office space and 70,000 square feet of restaurant/service amenities) in the Airport Corporate Centre in Mississauga (please see the Avison Young website for details.) The ground-breaking LEED-Gold development is one of the most prominent and important projects in the Greater Toronto Area and Avison Young is honored to be associated with HOOPP and the development team.
Thanks also go out to our minority investor – Tricor Pacific Capital, Inc. Based in Vancouver, British Columbia with an office in Lake Forest, Illinois, Tricor is a leading private equity firm which, on October 14, 2011, made a minority investment in our common stock. Tricor is the proverbial needle in the haystack as it relates to a cultural match and we look forward to working with the Tricor team to accelerate Avison Young's already aggressive strategic growth plans. Bradley Seaman and Roderick Senft join our Board of Directors to enhance our capabilities and our commitment to leadership in corporate governance.
Finally, we are thankful for every member of our Avison Young family. Not only is our company differentiated by our Principal-led culture, our industry-leading growth rates and our unique client-service model, but we work together as a team to meet all stakeholder goals, deliver results and, most importantly, have fun doing it!
Avison Young is exceeding all expectations as we execute against a clearly defined vision and plan, and we will never forget those who have taken us here and whom we count on everyday to reach our lofty goals.
We thank you all and wish each and every one of you a very happy holiday and a prosperous and healthy new year.
Thursday, December 1, 2011
Healthcare of Ontario Pension Plan (HOOPP) recently announced that they have acquired 33 acres in one of Canada’s landmark business parks, Airport Corporate Centre (ACC), in Mississauga. HOOPP plans to construct up to 1.1 million square feet (msf) of office space and more than 70,000 square feet (sf) of restaurant/service amenities. The site is south of Pearson International Airport and adjacent to the new Spectrum Station, which will form part of the Mississauga MiWay Bus Rapid Transit (BRT) line. (The BRT is a high-efficiency east-west transit corridor that is being constructed across Mississauga and is part of a 100-kilometre BRT corridor connecting municipalities from Oakville to Pickering, Ontario.)
One of the things my colleagues and I have noticed over the past couple of months is, despite the negative press and dire economic news revolving around the Eurozone and the United States, the office market in the Greater Toronto Area is starting to witness a distinct elevation in activity. While attending the Toronto Real Estate Forum yesterday I was interested to hear that a number of others have witnessed this same trend across Canada.
Some of the information I took away from the Real Estate Forum is that as we move forward into 2012 rental rate growth in the Canadian office market is expected, and that tenants throughout major markets in Canada should expect to see decreasing vacancy. With increased activity tenants may start to experience "Sticker Shock" as they are faced with higher than expected rates in an environment bombarded by negative media commentary on the global economy.
More significantly, because economics will support new development and the retrofit of existing product tenants will be given the choice between second generation office product and new energy efficient product that can elevate their brand and attract employees. One speaker at the Forum commented that he believed mixed use developments that combine residential, retail and office with easy access to transit would thrive.
Given the above, HOOPP's new development, which emphasizes the "urban" in suburban by mixing high-efficiency transit, retail and energy-efficient office development may turn out to be a "game changer" providing tenants in Mississauga with a high performance work place that is in short supply together with a suburban address that need not necessarily be surrounded by a sea of parking.
Wednesday, November 23, 2011
Bloomberg recently ran an in-depth article reviewing Alberta’s role in global energy supply in the wake of the American Government pushing off a decision on the XL Keystone Pipeline for 15 – 18 months (the article can be found here).
The article addresses a number of key issues facing Alberta’s energy policies which include evaluating Alberta’s potential trading partners, environmental risks associated with various pipeline routes and the delicate relationship between Albertan and American politics.
Immediately after the global economic correction which hit Canada in late 2008 there was a lot of ink spilled contemplating what historical averages, be they rental rates, commercial real estate vacancy rates or energy prices, Alberta would stabilize at. My position is that recent technological advancements and the forming of new international trade/investment relationships have rendered the correlation between historic and future averages nearly obsolete. As Albert Einstein mused that it is insane to expect different results by doing the same thing repeatedly I would argue that it is insane to expect the same (historic) market results by producing energy more efficiently and selling that energy to a broader market.
I draw this conclusion by evaluating the technological advances Alberta’s energy market has adopted through the past decades (horizontal multistage natural gas fracturing and steam assisted gravity drainage being two of the most advantageous) and the ongoing diversification of foreign trade/investment partners. These two market realities paired with buoyant oil prices have insulated Alberta from recessionary forces over the past three years and have put Alberta in a great position to meet the ever increasing global demand for refined and unrefined energy alike.
As recent Alberta energy land sales have hit all time highs this year, energy production is becoming more and more efficient and as the global energy markets are clamouring for more energy security Alberta seems to be an ideal market for long term investment.
Monday, November 21, 2011
The biggest news to hit this submarket is that California-based Bechtel Corp. will move 625 jobs from Frederick, Md. to Reston Town Center, where it will occupy 200,000 square feet at 12011 and 12021 Sunset Hills Road. The move will occur during the third quarter of 2012 to the buildings that were developed by Boston Properties in 1999.
Overall, as of the end of the third quarter, office rental activity in the Reston-Herndon submarket (along the Dulles Toll Road) of the Washington, DC. region remained sluggish though. This trend probably will continue into the first part of 2012. What activity there was, occurred through renewals and relocation.
According to the 3Q Avison Young Washington Report, the Reston-Herndon submarket has a vacancy rate of 14.49 percent; year-to-date net absorption of 247,000 square feet; and an average rental rate of $28.
While most leasing activity for this submarket was small to medium sized deals, in addition to the Bechtel announcement, ManTech Corporation signed a lease for a large consolidation of 109,736 square feet at 2251Corporate Park Drive in Herndon. The company will be combining several locations, which has been a recent trend among government contractors --- including Qinteiq, Deltek, and EADS North America --- to realize certain efficiencies and take advantage of current favorable rental rates. ManTech will be backfilling space vacated by Scitor Corporation, which is moving to 12010 Sunset Hills Road in early 2012.
The construction of the Silver Line Metrorail extension to Dulles International Airport is creating demand for mixed-use projects such as Dulles World Center, which will have its own Metro stop. At build out, it will be the same size as Reston Town Center and have 4.1 million square feet of office space in eleven buildings; 400,000 square feet of retail space; 1,300 residential units; and a 350-room full service hotel.
Uncertainty for 2012 is still the theme, but perhaps there are some silver linings starting to cling to the clouds we have been accustomed to seeing.
Thursday, November 17, 2011
Rand Stephens blogged about the forthcoming accounting rule changes here on May 2nd of this year. As Rand pointed out, the impact on the real estate industry would be significant. Companies will be forced to treat their leases as a new kind of asset that they would then have to place on their balance sheet, offset by a corresponding liability.
In yesterday's Wall Street Journal, this accounting overhaul (which is being coordinated between the U.S. Financial Accounting Board Standards FASB and the International Accounting Standards Board IASB) is finally getting traction in the mainstream media. That being the case, maybe this overhaul, which has been going on for years, is close to implementation. If so, get ready for short term leases with multiple renewals. In non-core markets where cap rates are penalized by leases with a short fuse, companies may be forced to purchase their real estate.
Wednesday, November 9, 2011
Monday, October 31, 2011
Thursday, October 27, 2011
By Michael Fonda - Chicago
I bumped into my friend Mark Goode of Venture One Real Estate at the recent Fall Conference of the Society of Industrial and Office Realtors ("SIOR") that was held in Chicago. Mark showed me an article by Boston Consulting Group (“BCG”) entitled Made in America Again: Why Manufacturing Will Return to the U.S. In this article, BCG has prepared an eye-opening analysis of the future of U.S. manufacturing. The piece (click here to read) predicts that manufacturing will return to the U.S. in a meaningful way, beginning as soon as 2015.
A combination of escalating wage rates in China, higher transportation costs from China to the U.S., supply chain risks and the cost of industrial real estate is improving the competitive position of the U.S. relative to China.
China, with 1.34 billion people, is a market that has to be serviced (and it will be by both Chinese and U.S. manufacturing plants in China). Although some manufacturing will migrate from China to India, Southeast Asia and Mexico, the U.S. (according to BCG) will begin to recapture much of the manufacturing and employment that has been lost since the 1950’s when the U.S. produced 40% of the world’s manufactured goods. If Joseph Sternberg, editorial page writer for the Wall Street Journal, is correct in the assertions he made in the article he wrote for the Journal’s editorial page on Wednesday 10/26/11, “The Phony Success of China’s Stimulus”, U.S. resurgence might even be bigger than even BCG predicts. Couple China’s possible missteps with changes being proposed by Dave Camp (R-Michigan), Chairman of the House Ways and Means Committee, regarding a transition to a “territorial tax system” (which is also being proposed by Governor Rick Perry, who is running for the Republican nomination for President of the U.S.) and there might be a tidal wave of cash returning to American shores to fuel this resurgence in goods manufactured in the United States. (Watch Representative Camp talk about his plan with Andrew Ross Sorkin on Squawk Box here.)
Global manufacturers will think strategically when deciding where to locate. They will consider total landed cost of their products, they will design flexibility into their supply chains and they will locate close to the consumer. All of this bodes well for the future of U.S. manufacturing, as long as the U.S. provides a favorable investment climate (like the proposals for a territorial tax system) and the labor force remains flexible and is well-trained.
In the August edition of Inbound Logistics, Lisa Harrington wrote an interesting piece on manufacturing returning to the United States, Is U.S. Manufacturing Coming Back - read here. In her article, she highlights Stephen Rogers' "Nine Steps to Choosing a Manufacturing Location." Harrington quotes Rogers cautionary statement regarding "reshoring" in which Rogers says, "It's expensive and difficult to bring manufacturing back to the United States, even if you kept the building. Companies underestimate the difficulty of training workers and building self-directed manufacturing teams."
BCG’s analysis focused on states in the southern part of the U.S. – Alabama, Mississippi and South Carolina. States like Illinois, although blessed with great transportation infrastructure, a large population and a world-class city – Chicago, still has work to do with regard to its bloated government and high labor costs relative to its southern neighbors. The good news is that the UAW and the Big Three (now an anachronistic term) automakers have begun to address both labor costs and sclerotic labor work rules. (I blogged about this in at the conclusion of my June 10th post. Read here.) Government reform is next. When that happens, Illinois may not only be the Number 1 climate for business in the Midwest, as Crain’s Chicago Business asserted in last week’s issue (click here to read) but possibly could climb to Top Five in the U.S.
The resurgence of manufacturing in the U.S. and Illinois….talk about hope and change!
Monday, October 24, 2011
This is my inaugural blog for Avison Young concerning the Washington D.C. market. I’m starting off with a quick overview of the market and subsequent blog entries will deal with DC area submarkets and property/tenant types.
In the Washington, D.C. region, commercial real estate leasing activity throughout 2010 was vigorous, but the reality is that the market lost steam in the first three quarters of 2011. Reduced tenant demand, coupled with a steady supply of office space, meant a small increase in vacancy rates and a slight decline in average rents. Not surprisingly, Class-A space in the region’s close-in markets outperformed properties in outlying markets (more on this in future blogs).
This less-than-positive overall commercial real estate picture mirrors the less-than-positive economic environment in the greater DC market: The region experienced three consecutive months of job losses and a divided Congress has stalled the passage of new legislation.
On the bright side....
A couple of positive items to share are:
1. As noted in the Avison Young fall newsletter, “over the last 24 months, several newsworthy tenants have chosen to relocate their headquarters to Northern Virginia, most notably Hilton Hotels Corp. (from Beverly Hills, CA to McLean, VA; 323,000sf ), Northrop Grumman (from Los Angeles, CA to Falls Church, VA; 334,000 sf), Verisign Inc. (from Mountain View, CA to Reston, VA; 221,000 sf), and Alliant Techsystems, Inc. (from Minneapolis, MN to Arlington, VA; approximately 50,000 sf total).”
2. And the new economic realities in the region have afforded tenants an opportunity to renegotiate and “rightsize” their space requirements, thus saving on real estate costs; or “trade up” to higher quality facilities with little or no change to their current office space outlays.
Thursday, October 6, 2011
By Norm Arychuk, Debt Capital Markets Toronto
We were going along reasonably nicely – relatively speaking, here in Canada, in spite of European banking issues, in spite of U.S. jobless numbers and in spite of a lack of growth in our economy. Then, as we went barreling down the road, it became apparent that we could not see the light at the tunnel’s end. As a result, we have our foot on the brake, ready to stop to avoid a crash. We are in many respects, starting to feel the world economy hitting repeated speed bumps. Will we be able to speed up again soon?
Tuesday, October 4, 2011
My 17 year old daughter came home with an interesting debate assignment last Thursday - to advocate “How Debt Destroyed Capitalism”. Not surprisingly, she was pretty confused by the number of contradictory opinions she had come upon in just a few hours of research on the internet.
Among the opinions she found were some of my personal pet peeves: Sovereign debt doesn’t count because governments can just print their way out of the problem…Bank debt doesn’t count because it’s possible to purchase credit default swaps to insure over those risks…and lastly, personal defaults don’t really matter because everyone is overextended days, lenders are incorporating this into their pricing (like that explains why your credit card company charges 14.5% interest while the government can borrow for around 2%).
I assured her that not everyone is defaulting these days; credit default swaps are not insurance; and sovereign debt counts just the same as other debts regardless of how much money is printed. Since all forms of debt compete for scarce resources, in an era of deleveraging what government elects to do or not to do really matters. We are finding ourselves in a world where increasingly instead of bankers deciding who will and won’t have access to credit it is politicians making those decisions, with a different set of criteria from traditional Capitalist rule-books.
In an interview yesterday on Bloomberg about widening spreads on Morgan Stanley credit default swaps, the interviewer kept talking about the increasing cost “of insuring” these bonds. The person being interviewed pointed out that the daily swap spreads are really more indicative of hedge funds betting on short term political risks the bank might be exposed to than underlying credit strength of the institution relative to its peers. This very technical discussion highlights Problem #1 – poor understanding of the role and array of contemporary credit instruments and Problem #2 - the proliferation of ways to bet on the market, and huge daily movements of capital which affect outcomes.
At a conference last week here in
Much of what is currently being touted as a “debt crisis” is in fact, a political crisis - that is the inability and/or unwillingness to find palatable solutions that involve collective sacrifice to achieve collective outcomes. Because these discussions get instantly polarized into “winners and losers” they strike at the heart of what is undermining confidence that is so essential to smooth functioning of what is increasingly a global marketplace. In today's world we are all interconnected, the fortunes of the least impact us all. Since political risk is the hardest of all to gauge accurately, it’s no wonder markets are touching new lows.
Saturday, September 24, 2011
By Michael Fonda - Chicago
All of Avison Young gathered in Toronto last week for our Annual General Meeting. I’ll let Mark Rose or Earl Webb blog about company performance and our upcoming exciting announcements. This blog is about how my colleagues, Christine Choi and Hugh Williams (pictured) , and I used our free time on Saturday to experience a little Toronto serendipity.
Leaving the Royal York Hotel on Saturday morning, we decided to walk north to the University of Toronto campus. On our way we stumbled upon a Bixi bicycle docking station and decided to bike rather than walk. Looking like the tourists we were, it took us a fair bit of time to figure out the process of renting a Bixi. It’s actually relatively easy. Insert your credit card (you are charged $5.65 for 24 hour use of the bike); punch the icons on a touch screen; receive a piece of paper with a six-digit code printed on it; punch in the code on the docking station; pull the bike away from the station and off you go (after adjusting the seat height).
We rode to the Annex (a great residential neighborhood close to downtown); dropped in at the Nike store’s Runners Lounge on Bloor Street; visited the Royal Ontario Museum (because Hugh was born in Jamaica and because Michael Lee-Chin, the wealthiest person in Jamaica, is a benefactor of the museum we couldn’t miss that venue); the Art Gallery of Toronto; peddled around the University of Toronto and Chinatown; parked the bikes at a Bixi station downtown and ate lunch at Earl’s (a restaurant not associated with AY's U.S. President, Earl Webb).
The next morning, before our 24 hours expired, we road east to the Distillery District, explored the St. Lawrence Market and ate breakfast at the Le Petite Dejeuner (where we chatted up the talented proprietress, Tonya Reid). After breakfast we rode back to the Royal York, having deposited our bikes at closest Bixi station. We departed Toronto from the Island Airport on Porter Airlines.
Bixi is an interesting concept. Starting in Montreal, Bixi is now in eight cities and will soon be rolling into New York City with 10,000 bikes and 600 bike stations. The company appears to be a private-public partnership with a “green” business model. Read here for a more in-depth commentary on Bixi. Seeing Toronto by bicycle was fun. We met a lot of helpful Torontonians who directed us to restaurants, interesting neighborhoods, and attractions. When we were stumped by quirks in the Bixi process, knowledgeable Torontonians helped us out. Next year’s Annual General Meeting will take place in Washington D.C. Bixi is there and we will be too.
Next time you are in a city served by Bixi, try it.
Wednesday, September 14, 2011
By Amy Erixon, Toronto
There was fruitful discussion about bracing for global headwinds at the annual REIT conference yesterday in Canada. The overall sentiment was cautious, a marked change from last year. Not surprisingly, the most pessimistic was the sole European participant followed closely by the American portfolio managers, who noted they are triple overweight Canadian real estate securities as compared to other regions, on the assumption it will hold up better in the event of another downturn.
Most Canadian panelists concurred, asserting that fundamentals in Canada are healthy and CEO’s are spending their strategic planning efforts on strengthening and diversifying their capital structure. There was robust debate about effectiveness of various capitalization tools including unsecured vs convertible debentures, timing of equity follow-on offerings, managing bank lines, and other widely employed strategies. There was also a discussion of some of the more innovative approaches tested during the last downturn including rights offerings, warrant sweeteners, and companies who paid dividends in shares vs suspending distributions in 2009. These debates underscored how much more sophisticated and defensive the public real estate companies worldwide been forced to become in recent years.
The moderators dug deeply into what participants learned in late 2008 and 2009 and how that has altered their capitalization strategies going forward. In general, companies with a strong value-add and development orientation indicated a preference for utilizing convertible debt (as best aligned with asset performance characteristics) whereas core oriented companies expressed a preference for unsecured debt when and where available, and all underscored the importance of maintaining a pool of unleveraged assets (for a rainy day). Universally participants indicated a need to have cash, or access to cash as a business climate imperative.
Lastly, there was debate about correlations of REITs with the stock market and their merits vis-a-vis open and closed end funds. This was followed by a discussion whether pension funds should/can/will become major players in the REIT (and REOC) markets globally. Conclusions were mixed, but generally it was felt in the US yes, Canada no, rest of the world maybe. The primary reason for the US is that US REITs have more flexibility to employ operating strategies (development, JV’s etc) to make the real estate perform like real estate, acknowledging it is strongly correlated to stocks during strong downturns. Many non-North American REIT markets are newly emerging and/or facing regulatory shifts which may make the sector more or less attractive to institutional investors over time. The emerging markets are comprised 80% of publicly traded development companies, particularly housing developers, possibly providing powerful future growth prospects. Some questioned whether the risk/return trade-off has been appropriately priced for these types of companies when compared to their US and Canadian counterparts. All in all, a healthy debate highlighting the pivotal role this sector is currently playing in recovery and recapitalization of property markets throughout the world.
Thursday, September 1, 2011
In speaking with a client this week, they asked me what differentiates our management approach to managing the different classes of commercial properties (retail, office and industrial). Though each asset class requires the core property management services of rent collections, physical maintenance, accounting and administration, there are definitely differences amongst the property types. Here is how we see it.
• Of all property types, the Landlord/Tenant relationship is very much intertwined. Each is dependent on the other to generate an ongoing market presence and mutual success. As a retail property owner, you are very much involved in your retail tenants’ business success or failure.
• Generally, a retail lease is much more complex than other commercial property types, dealing with such issues as exclusives, tenant sales and percentage rent, co-tenancy ownership with major retailers (anchors), tenant radius clauses, allocation of Common Area Maintenance (CAM) costs, etc. So our lease administration and negotiations are much more extensive and ongoing throughout a tenant’s occupancy.
• Retail management involves a detailed approach to marketing, market presence, tenant mix and services, community involvement, shoppers and their attitudes, the public’s gathering, enjoyment, comfort and security. So a Retail Manager is much more engaged with the public and has extensive personal interaction with their tenants.
• Rental collections tend to be more demanding than other commercial property types because sales can vary by month and time of year. Inevitably, it is the Landlord’s fault if sales for the month were poor.
• Our primary focus is on tenant services and comfort, providing tenants and their staff a productive and conducive work environment.
• In our office properties we strive to create a professional business atmosphere for our tenants and their guests.
• Operationally, we maintain and operate more sophisticated machinery, equipment and building systems when compared to the other property classes.
• Environmental responsibility, sustainability and energy management are key drivers today in our approach to office management.
• Our primary focus is on the maintenance of the exterior structure, grounds and parking areas.
• To ensure tenant retention and success, we are very much concerned with our tenants ease of shipping and receiving of their goods.
• From an owner’s perspective because of the nature of industrial businesses, wear and tear on their assets is greater than other property types along with Industrial owners face the greatest risk of tenants creating environmental situations
To recap, retail management is very interpersonal, office management is focused on the work environment and industrial management is geared towards structural management and risk mitigation.
Friday, August 26, 2011
By Amy Erixon, Toronto
The disconnect between fundamentals and pricing continues to be as much a topic of discussion as speculation when the
Property, whose historic role in a multi-asset class portfolio is to provide steady income and stable value, is at present being buoyed by external factors such as record low interest rates and perception of relative price reasonableness (compared to investment alternatives of stocks, bonds, commodities, infrastructure, etc), driving yields to historic lows. In fact this week Goldman Sachs reported that the correlation of all “key assets” has reached the 96th percentile over the past two months, a level reached only four times in the past decade, (but three times in the last two years). These are the characteristics of a market driven by emotion vs reason. It demands that we pay close attention to actual fundamentals, and understand how each asset class is being affected by these relative comparisons.
In my view, Real Estate’s role in a multi-asset class portfolio is increasing in importance, which has and will continue to mean investors accepting lower returns. Everyone is losing patience with the volatility in the stock market. These relatively high valuations might in fact make now a good time to harvest gains on non-strategic property while being patient and careful in the deployment of new resources.
Withdrawal of governmental support such as quantitative easing combined with the inevitable need for refinancing of the overhang of maturing CMBS, FNMA and private mortgages over the next few years will permit the anticipated liquidity crunch to unfold. Investment opportunities in both fixed income and real estate spaces will improve during the upcoming years. But in the short term the weight of capital shifting may cause yields to decline further. Properties offer distinct tangible features which still serve to lower overall portfolio volatility relative to other asset classes; such as high replacement value, market barriers to entry, distinctive claim on earnings (behind taxes, ahead of other creditors), and long duration predictable cash flow characteristics. This is even true for properties located in currently overbuilt markets.
REITs offer investors a highly liquid vehicle for accessing the sector and a variety of quality operators and sector strategies. REITs are enjoying renewed appeal with both retail and institutional investors. But historically, REIT valuations are on average are around 50% correlated with private property market and 50% correlated with the stock market. The problem with REIT stocks as a portfolio diversification tool is, of course, that the volatility of the stock market affects REIT volatility at precisely the time one would want it not to (over 90% currently). As global markets and all asset classes are becoming increasingly more synchronized this feature of publicly traded vehicles becomes more problematic. Additionally as the overall size of REITs as a percentage of overall property ownership grows, this volatile pricing effect spills into the private property market as well.
There is an under served market demand for a suite of private real estate vehicles that provide investors with the intrinsic benefits of property. To achieve this we need to rethink the trade-off between liquidity and pricing characteristics that are appropriate to the asset class.
Wednesday, August 17, 2011
By Michael Fonda (Chicago)
On July 29th, CoStar presented its Mid-Year 2011 Industrial Real Estate Market Review and Outlook for the United States. Jay Sivey, Hans Norby and Shaw Lupton, from CoStar, were the presenters. If you have access to CoStar, you should view this presentation. You can do so by going to CoStar’s home page and clicking on the tab on the far right – Knowledge Center. Then click on CRE Market Reviews. Select the particular “Session” that interests you. My specialty at Avison Young is Industrial Real Estate, so I went there.
My takeaways from the CoStar presentation are that: a) occupancy levels will continue to increase b) developers and their capital partners will continue their reluctance to create new supply and c) industrial real estate investors are willing to accept less of a return on their investments today than they were in 2008 and 2009.
Net Absorption: Net absorption has finally turned positive. CoStar is reporting approximately 94 million square feet (msf) of net absorption so far in 2011. Hamid Moghadam, CEO of Prologis (world’s largest industrial Real Estate Investment Trust with 600 msf of space worldwide), reported in Prologis’ latest earnings call that Prologis is projecting 150 msf of net absorption in 2011.
Supply: Total inventory of industrial real estate in the United States is a little over 20 billion square feet. Average annual deliveries of industrial real estate are 2.5% of inventory or approximately 500 msf. Since 2009, annual deliveries have been more like 30 to 40 msf or .02% of inventory. We lose, on average, 1% of industrial real estate inventory every year or 200 msf. We aren’t even close to replacing this inventory.
Distressed Sales: According to CoStar, distressed sales as a percentage of total sales increased sharply beginning in 2008. That trend has plateaued and is now starting to reverse itself.
Forecast: A good case can be made for increased absorption outstripping decreased supply, resulting in higher rents for industrial real estate by the end of 2012. Unfortunately for Chicago and the Midwest, there is a slight problem. That problem is articulated by Michael Barone in yesterday’s Wall Street Journal. To quote Barone, “The Midwestern (economic) model is unraveling before our eyes.” The good news is that the Midwest is voting the Old Guard out and replacing them with more forward looking leaders. Though it may take the Midwest a bit longer to share in the positive momentum beginning to develop in other regions of the U.S. industrial real estate market, we’ll get there.
Tuesday, August 9, 2011
By Mark Rose (Toronto)
In Canada, the propsects of a stable economy and improving leasing market fundamentals continues, as we look forward to the second half of 2011 – this, despite the lagging performance in the U.S., strange behaviour by the U.S. government, and a debt crisis that has consumed the Euro-zone, in particular Greece.
Two key metrics among others that influence the overall health of the market are business confidence and job growth. Business confidence remains positive, now close to 70% – up from around 58% one year ago and 35% at the height of the recession.
Canada's unemployment rate was unchanged in June at 7.4% as the number of people participating in the labour market increased. Employment rose for the third consecutive month, up 28,000 in June, surprising many analysts. Over the past year, employment has grown by 238,000 (+1.4%).
Despite the summer season, leasing markets remain active across the country. A recent survey of Avison Young’s markets across Canada revealed a national office vacancy rate of 7.8% – down 210 basis points from the same period one year ago. Conditions are especially tight in the country’s downtown markets – collectively showing a vacancy rate of 6.2% at the midway point of 2011.
Read the press release and full report here:
Avison Young releases Mid-Year 2011 Canada US Office Market Report: Decreasing vacancy and rising rental rates evident in many markets as business confidence grows; Canada continues to lead US in recovery
On the development front, there is more than 8 million square feet of office space under construction in Canada – with more than 70% of the office space already preleased. And on the investment front, $8.5 billion worth of commercial real estate changed hands in the first half of 2011 – a marginal increase over the first six months in 2010. Toronto is the hottest market… and retail the most sought after investment, capturing more than 50% and 28% of the investment volume, respectively. Of course trophy assets are highly contested and confirmed by very low cap rates.
Year-to-date 2011 capital raisings (Canadian REITs and corporations) equate to $2.8 billion, in line with the 10-year historical average aggregate of $2.75 billion/year. In all, $5.6 billion was raised in 2010. And 2011 looks to at least match that. REITs remain the biggest buyers. The big news since our last update? Dundee REIT will soon close the largest office portfolio (24 assets in 2.7 msf) ever acquired by a Canadian REIT for $690 million from Blackstone Real Estate Advisors and Slate Properties.
The momentum established over the past 12 months, and particularly through the first six months of 2011, is expected to keep building for the remainder of the year.
And now we turn to the U.S…..
Two years into what has been an uneven recovery, a wide gulf remains between Canadian and U.S. office leasing fundamentals. Canada continues to lead the U.S. in this recovery, having weathered the storm of the recession more robustly. Employment, a leading indicator, has propelled Canada’s office markets forward, while in the U.S., employment gains have largely been lagging and inconsistent.
There are serious issues and risks facing the U.S. economy. As of June 2011, the Federal Reserve of the United States has pulled back on quantitative easing; employment growth and GDP are anemic or trending negatively; and the politically-embarrassing debate over the U.S. debt ceiling has potentially undermined the economic recovery.
This month, the Bureau of Labor Statistics reported a national unemployment rate of 9.1% for July -- essentially unchanged from June and May – and although it represents the highest level since year-end 2010, it remains lower than averages reported during most of 2010.
Sectors adding jobs included the professional and technical services sector, which added 24,000 in June and has added 245,000 jobs since its recent low in March 2010. Government jobs continued to trend down over the month, losing 39,000 jobs in June -- 14,000 of which were federal.
State and local employment has been falling since the second half of 2008. And as state and local governments struggle with operating deficits, these employment losses could serve to dampen the effect of any private-sector employment growth, and remain a threat to a broader economic recovery.
The U.S. office market saw its vacancy dip to 12.6% in the second quarter from 12.7% in the first quarter. The 10-billion-square-foot U.S. office market recorded positive net absorption of 12 million square feet in the second quarter – most of which was in class A space, as tenants continue to take advantage of oversupply and “trade-up”. As well, sublease space continues to decrease (it has fallen each quarter for the last four) and points to trending market improvement.
One area of optimism is the recovery of the sales market. Core assets, with stable cash flows, will remain the most desired investment class, especially in the biggest markets. There is a healthy sales and financing environment right now, albeit with minimal improvement in real estate market fundamentals.
According to Real Capital Analytics, June is on track to record the highest volume of sales thus far in 2011, and more than double the volume during the same month last year. The major markets of Manhattan, Washington, DC and San Francisco account for nearly half of the volume as of May.
Job growth is key to improved fundamentals, and those numbers have been bumping along. Watch what happens to the public sector employment numbers in the coming months as election campaigning season ramps up.
You can also listen to this Q3 2011 update on our Avison Young Audiocast tab: http://www.avisonyoung.com/Media_Room/Audiocasts/2011_Audiocasts/
Wednesday, August 3, 2011
Friday, July 29, 2011
There has been much said about the debt ceiling in the U.S. I have heard some good ones that are worth sharing:
“You mean that the government can approve a budget for spending and then decide later if they want to actually pay for it. Rather odd don’t you think?”
“The debt ceiling in the U.S. is akin to loading up your Visa card and then deciding later if you actually want to pay it or not.”
“Is the U.S. economy going to be the next Japan?”
As the deadline to raise the ceiling approaches, the fear is not necessarily that Congress will not allow for more borrowing, but rather that there will not be significant enough budgetary amendments to satisfy the holders of U.S. Treasuries, and of course the rating agencies. Maybe it is time that the U.S. recognizes that it is not the undisputed financial powerhouse that it once was. Many nations have been taken down a peg or two as a result of not only the financial crisis, but a long history of living on borrowings that are not sustainable. There has been incredible pain felt in the U.S., hopefully it has been enough.
Gold. From 1833 through 1919 it had a price variance of about a buck, hovering around the $18 - $19 range. From 1920 to 1971, it experienced a price doubling from $20 – to $40. 1972 and 1973 contributed sufficiently to see a price of $100. By 1979 it hit $500. In 2010, it finally broke through the $1,000 threshold and now stands near $1600, only a year later. There are predictions that it will hit $2011 by the end of 2011. This acceleration of price demonstrates the general lack of confidence in many ways, in the ability of the governments to manage fiscal policy in tune with growth. Is it too late to buy gold?
Wednesday, July 27, 2011
Hugh Williams, my partner at Avison Young, suggested that I read the latest biography of Warren Buffett, The Snowball: Warren Buffett on the Business of Life by Alice Schroeder. In the book, Schroeder writes about a favorite adage of Buffett. "In the short run the market is a voting machine but in the long run it is a weighing machine."
Reading the Wall Street Journal's Property Report this morning, I came across the following article: Lehman Cranks Up Sales as Prices Rise. This news story aptly illustrates Buffett's adage. As I discovered by reading Money and Power: How Goldman Sachs Came to Rule the World by William Cohan, in February of 2007 Goldman marked their mortgage securities at 98; in March of 2007, those same securities were marked at 55. This drastic change in Goldman's marks destroyed the value of the real estate securities market and triggered the calamity that followed. Goldman had the cash (the votes) and their investment banking competitors, like Lehman, didn't.
Fast forward to 2011. Lehman Brothers Holdings has agreed to sell a portfolio of 10 office buildings in Rosslyn, Virginia to a real estate fund of Goldman for approximately the same price that Lehman paid for the portfolio in 2007. As Buffett might conclude, the asset weighs the same in 2011 as it did in 2007.
It's a shame. All this pain and, four years later, the value of real estate remains the same.
Thursday, July 21, 2011
The Avison Young Office Report for the second quarter of 2011 (found here) points out Calgary’s office market has continued its recovery with quarter over quarter positive absorption rounding out two years of declining vacancy. As drilling rig utilization and energy investment continue to increase in Alberta we see more positive absorption possibly at a quicker pace occurring in the remainder of 2011.
The office leasing market is certainly not the only market we are witnessing robust leasing and investment activity. As the Avison Young Mid Year 2011 Retail Report (found here) points out retail leasing has also had a strong start to 2011 as retail sales increased and unemployment trended downward. Popular American retailers have also began to enter the Canadian market (Target, J. Crew) which has motivated Canadian groups to look at consolidation and diversification.
With China’s CNOOC stepping in to purchase Opti Canada Inc, a prominent oil sands producer (see CBC's coverage here), Canadian Tire announcing its purchase of the Forzani Group for $781M (see Reuters' coverage here) and Target taking over up to 220 lease hold interests for $1.8-billion from Zellers, the only certainty in the Alberta market is the liquidity and interest in most things producing, leasing or developing be they energy or real estate related.
On the investment front we have recently seen low benchmarks being set in both retail and office transactions with interest returning to all classes of real estate investment product in almost every part of the province, be it small retail in Lethbridge, distribution facilities in Calgary or core office product in Red Deer.
I am interested to see how the American Government resolves the debt ceiling issues surrounding the August 2nd deadline because it seems any measure but to increase the debt ceiling could have far reaching repercussions into every market in the world, including the ability to stunt Alberta’s robust and quickly recovering economy.
Friday, July 15, 2011
By Amy Erixon (Toronto)
Great article in NY Times this week by David Leonhardt called “Why Taxes will Rise in the End”. Bottom line, he states, is there is no such thing as a free lunch. Americans want to protect social security and medicare, two of the three great, looming unfunded government liabilities, yet they stubbornly refuse to pay for it. Can’t have it both ways.
Developed societies around the globe are facing the same political issues: slow-growth economic consequences of financial system de-leveraging and relentless demographics of aging populations. At a time governments should be addressing coherent energy, infrastructure investment and job creation strategies to preserve standards of living in light of rapidly shifting global economic and political realities, they are instead trying to figure out any way to avoid the political heavy lifting of prioritizing spending, rationing public largess and distributing the burden to pay for it. This debate will only get harder as the preponderance of voters moves toward retirement.
In thinking about implications for real estate investors, property tax burdens are an obvious concern. In the US, where avoiding ones share of the tax burden has become the national sport this is one of the causes of job migration from downtown to suburban bedroom communities. A second area likely to be impacted are tax free rollover schemes as well as long term capital gains treatment, duration and marginal tax rates on these profits.
The federal government has already started to examine tax treaties as a way to achieve the multiple objectives of increasing revenues and steering foreign investors from equities into debt products that can help reduce the swollen Fed balance sheet. This is clearly low hanging fruit for the political crowd, since by definition foreign institutions are not voters.
As liquidity returns to the property markets it is important not to lose sight of the fact that tax policy will have a meaningful effect on returns, hold duration and composition of buyer/renter population. At the regional and intra-regional level tax policy will also have an impact on real and relative job growth which translates into rental rate growth and long term property valuations.
In the end, governments can only get the money from the people who have it. And the reality is, long-standing public sector income redistribution schemes cannot be phased out overnight.
Friday, June 24, 2011
This week's finger pointing game returned to Greece, with the new revelation that the high levels of exposure to Greek debt at the French and German banks may be insured by US and UK banks who, in turn, have purchased credit default swaps from US based hedge funds who may not be good for the possibility of 240 billion Euros of anticipated defaults. All of this serves as a reminder how complicated and global these issues and instruments have become. Even assets that are relatively straightforward to value, such as mortgages and properties have valuation metrics that are being tested by quantitative easing on one hand and regulatory uncertainty on the other.
The most recent issue of Avison Young Global Capital Market Newsletter highlights reform efforts and setbacks faced by German regulators in their efforts to put more conservative controls on financial instruments backed by real estate sold to the German public. The initial regulatory proposals spooked investors about possible limitations on liquidity and in doing so triggered the very thing it was trying to head off - a run for the exits.
Those of us schooled during the last century can't help but notice with alarm the collapse of confidence in the government's ability to stabilize the markets. I for one find that it is impossible to take seriously the finger wagging by US officials concerning everybody else's fiscal situation when the US government continues to borrow staggering sums of money for current activities, poo poos the need to address taxes, and sweeps under the carpet mention of the unfunded (but legally owed) future obligations such as public sector pensions, social security and Medicare. A recent and well researched article in The Globe and Mail by Neil Reynolds, June 22, 2011 suggested that prominent US economists, such as Laurence Kotlikoff at Boston University put estimates of US unfunded liabilities at $200 trillion, or more than $1 million per US household. This is nothing short of astonishing.
Which leads me back to what I was taught in school. Investing is not a form of legalized gambling. Only lend money to businesses and people who have a sound plan to pay the money back. Borrow conservatively and stagger maturities. Focus on increasing income, that's where the money is made. Those were the days.