Search this blog:
Follow Avison Young:

Monday, February 28, 2011

Democratization of Manufacturing

By Michael Fonda (Chicago)

Michael Farrell, my colleague from our Vancouver office, beat me to the punch but I’m still going to comment on 3D printing because as Michael said in his blog entry, 3D printing could turn out to be as disruptive a technology for manufacturing as the internet has been for the music recording industry.”

Last weekend I was in Brooklyn, New York visiting my son Tyler. Tyler is Director of Strategy at Gotham, an advertising firm. He is always thinking about where our culture is headed and as we drove down Third Avenue, he pointed out the headquarters of MakerBot Industries . He, like Michael, had read the Economist’s article on 3D printing and was describing the concept to me and I was intrigued.

Fifteen minutes previously, Tyler and I had driven through the financial district of Lower Manhattan. I was struck by the opulence of glass and steel structures occupied by the large financial institutions in comparison to MakerBot’s cramped 10,000-square-foot space in a 1920s vintage brick-and-mill building located in a grimy industrial section of Brooklyn called Gowanus. I decided that you can tell the financial engineers from the real engineers by their headquarters. Ironically, it’s the real engineers who fuel the growth of our economy. They are the whales navigating the economic oceans. The financial engineers are merely the pilot fish who can only survive by their proximity to the whales-those who possess the truly revolutionary ideas.

I had to get a peek at MakerBot. So Tyler and I walked from his apartment at 8th and 4th to the MakerBot headquarters at 3rd and Dean. We opened the door to the “Bot Cave” as the Maker Bot headquarters is affectionately known and introduced ourselves to Herb. No receptionist, just Herb sitting at the front door working on a project. Herb showed us the Bot Farm, a group of Thing O Matic machines (as the 3D printers are called) and some of the parts that the Thing O Matics were creating. Herb introduced us to Isaac Dietz, Support Manager of MakerBot, and a graduate of the University of Michigan. It was Isaac who introduced me to the term, The Democratization of Manufacturing. MakerBot builds its machines based upon open source architecture in order that collaborative invention can take place.

Suddenly, the future came into focus as I visualized how my sister-in-law and her husband would utilize 3D printing in their sunglass business Centerline Optics. They would no longer have to source product from China. No more ordering months in advance of their selling season. No supply chain risk of political upheaval in China, of a lost TEU on the Pacific Ocean, of a longshoremen’s strike at the Port of Long Beach, a diesel fuel spike that drives up the cost of transporting the product across the North American continent. All design, manufacturing, marketing, distribution, and sales would happen out of the Centerline “headquarters” in Old Lyme, Connecticut. Centerline’s customers are all within four hours of the “headquarters”. Talk about efficient allocation of resources.

Clayton Christiansen, Professor of Business Administration at Harvard Business School, authored The Innovator’s Dilemma in 1997. In his book, Professor Christiansen described how the mini steel mills, Nucor and Chaparral (by operating in a different value network-the commoditized, least-profitable end of the market, corrugated steel roof decking) used their experience and low-cost structure to produce finer and finer grades of steel. By continuously improving their product offering, the mini mills marched up-market, until they eventually challenged the large integrated mills, U.S. Steel and Bethlehem , in markets that seemed protected by what appeared to be barriers of entry that were insurmountable.

So, as a disruptive technology, the 3D printer could be “The Big One”. Like the mini mills, the product produced by the 3D printers will continue to evolve. There will soon come the day when, after you backed your Range Rover into a concrete pylon and shattered the brake light, you will pull up the design of the brake light on your pc and print out a new brake light right in your home or office. Talk about shortening the supply chain; it’s only a few steps from product production to installation. Don’t forget the screwdriver!

Check out MakerBot's blog here.

The Importance of Expectations

The recently released Canadian Investment Property Database (http://www.IPD.com) reported average annualized returns for Canadian property in 2010 of 11.1%. The median anticipated return according to IPD's survey of participants was a mere 3.9%, an underestimation of 720 basis points.

What is behind this spirit of caution, and what are the implications of being so conservative? Years ago, when I was in grad school, my economics professor Lester Thorow, used to advise his students, "if you are going to guess, be wrong on the downside, that way no one will be mad when things turn out better". But a miss like this makes one wonder, what are the consequences of such conservative behavior? Would we have behaved differently had we known the property markets would be so much stronger?

It is human nature to be cautious when the markets are still being buffeted daily with new sources of uncertainty. But property markets with intrinsic valuation stabilizers such as significant barriers to entry, high replacement costs and long term leases that enable them to ride out many of the vicissitudes of shifiting political and economic winds are fulfilling their role in multi-asset portfolios. Canadian markets, in particular have been resilient, maintaining low vacancies and some of the developed world's highest cap rates. If anything, confidence in continued strong performance from Canadian property markets against this backdrop should be a given.

As the year ahead unfolds, property markets look attractively positioned for recovery in a growing number of locations. A plethora of domestic and off-shore investment options look to be coming into the market to meet the demand of returning capital and existing investors frustrated by low returns on alternative investments. Liquidity is improving and the ongoing recovery, although spotty and uneven is likely. Some of these products will be very well timed, and others not so much. The key will be to discern better than we did last year, which markets/sectors are poised to pop.

Sunday, February 27, 2011

Houston Commercial Real Estate: Are We Out Of The Woods?

I'm asked everyday by my friends in the Houston business community, "how is the real estate business"? Over my 24 year career, I've seen times where it was much worse that it is today. For instance, the vacancy rate in the office market reached 35% in the late 80's, and after 911 and the merchant energy meltdown caused by Enron, the vacancy rate reached 15.7%. During the Great Recession, which began in Houston in the 4th quarter of 2008 (exacerbated by hurricane Ike) and ended 2nd quarter of 2010, vacancy rose to only 14%.

Annual rental rates are currently $22.77 for the overall office market which represents only a 3.5% decline from the market peak in 2008. Houston has now had two consecutive quarters where the vacancy rate has come down, and at the end of the 4th quarter 2010, it stood at 13.4%

In 2011, the office market should remain healthy and experience continued improvement assuming the positive job growth for the city occurs as projected. This should be the case for all product types including industrial and multi-family. Retail is the exception and more complicated to predict as the rapid rise in Internet shopping has left many retailers "over stored", which combined with the drop in consumer spending, does not bode well for future occupancy. However, many retail property owners are shifting their tenant mix to include more restaurants and entertainment venues which is a segment of the retail world that is still doing well. I don't know what you all experience, but whenever my wife and I go out for dinner, it's hard to get a table; eating out still seems to be a big part of every one's budget.

There has been virtually no new construction in any product category since 2008, and unlike many other markets around the country, Houston's developers exercised discipline during the last boom and did not create an oversupply problem. There is no new development on the horizon, as construction financing is basically non-existent.

Sales of investment properties also improved in 2010 as the capital markets stabilized and the availability of debt came back to the market. However, debt and equity have shown caution and discipline and capital has only gone to acquiring high quality assets that have strong occupancy fundamentals or properties in distress that can be bought at significant discounts to their 2006-2007 valuations.

Takeaways:

With no new inventory coming to market, and with improved job growth, Houston may experience a shortage of quality facilities in the not too distant future. As Landlords become more confident, rental rates may spike rapidly. Tenants should work to lock-in rental rates now and push for options to secure space for future growth.
Houston is a great city for making real estate investments. The market fundamentals are sound and with no new inventory on the horizon, owners will have an opportunity to significantly increase rents over the next 2-3 years with even moderate job growth.

Friday, February 25, 2011

Confidence- It's a Global Word

As February draws to a close, we have had an opportunity to build on our 2011 forecasts, present to the industry and meet with clients to discuss the drivers that impact real estate decision making. Long term strategies are sound and opportunities are available to grow and prosper in this environment. Interest rates are low, capital is abundant, GDP and employment look to be going in the right direction and most importantly, decision makers are becoming optimistic. On the investment side, 100% of our meetings year to date have resulted in the same mandate- "find us product!" Everyone wants to grow, but finding the right investment at the right price is key. The same can be said about the occupier. Decision making is loosening up as the clouds disappear, stability returns and clarity of purpose comes back.

All is looking good in North America, but not so fast- we live in a global world. Over the past few weeks, the events in the Middle East illustrate a point we have been making for some time. Mainly, we live in a global world, no matter how local you would like it to be. Whatever your views are of the struggles and protests in Egypt, Bahrain, Tunisia, Iran and Libya, these conflicts will impact the global world and global decision making. This week, Libya took center stage as the first oil producing country in trouble and was responsible for sending Brent Crude Oil to $120 a barrel. The fact that this rise in oil resulted in heavy losses in global financial markets is secondary to the price increases we are experiencing in commodities. Given rapid commodity inflation- will the economic recovery be derailed? If not, is this all part of healing or are economic inputs moving too quickly? Will Quantitative easing end quickly, followed by interest rate hikes to combat inflation?

These issues will play out eventually and we will get past this too, but expect concern to reemerge and short term strategies to dominate the Board Room as global decision makers navigate these material events. It just seems that we are limited to weeks and months of good news and not years of prosperity and stability to allow decision makers to attain the level of confidence necessary to grow. Economic and social influences are global. Our financial markets are global. Our local decisions are impacted by global pressures. Confidence is a very specific, local human emotion, but confidence is now global in context.

Looking past current events, spikes in commodities and inflation discussions that are sure to dominate over the next few months, we are looking for stability and the orderly digestion of market influences in the back half of the year.

Wednesday, February 23, 2011

Blog intro and 3D printing...

Vancouver, British Columbia, and its surrounding metropolis, is known worldwide for its residential real estate. The word was first spread by visitors to Expo ’86 and, more recently, the 2010 Olympic Winter Games. The city is repeatedly at the top of ‘the most liveable cities’ in the world rankings (#1 two years in a row!) and demand is driven by strong immigration, mostly from Asia.

But what about commercial real estate? Does the city’s ‘international’ reputation flow through to the four segments that make up commercial real estate (Investment, Office, Industrial, and Retail) and if so in what way does it benefit or harm each sector? How does the city’s picturesque location on the Pacific make it strategic economic property for the country as a whole and does the rugged terrain pose challenges to industry?

These are some of the topics I hope to cover as I make my maiden voyage into the Blogosphere. However, I must warn everyone that I worked hardest at my second year literature course in university, but got the lowest grades, so please don’t expect any awe inspiring prose. You can expect a few tangential rants and hopefully some entertaining and informative media posts, if our corporate legal counsel will allow it.

I also take a keen interest in international and technological developments and how they may affect commercial real estate locally as well as globally. For example, The Economist recently ran a cover story titled “Print me a Stradivarius – The manufacturing technology that will change the world.” The article discusses the rapid advancement and adoption of 3D printing technology, a process by which compounds are layered (as small as 0.02 – 0.03 mm) repeatedly until the desired object is created. The final product can have moving parts (a Grandfather clock was recently printed at MIT) and can be printed in a variety of materials including nylon, titanium, and plastics.

The technology could have a profound effect on real estate in two ways. Firstly, it could turn out to be a disruptive technology for manufacturing as the internet has been for the music recording industry. For example, the technology would make it possible to produce huge volumes of customized parts, which would reduce the importance of economies of scale. This is an advantage manufacturers in Asia have enjoyed over America and Europe for some time. The technology could allow for a partial shift of manufacturing back to the West which would increase demand for real estate well-situated for manufacturing on these continents.

Secondly, if parts can be manufactured on demand by a 3D printer based on a design that can be transmitted anywhere in the world via the Internet, then why would you ever need to ship anything via courier? This is probably why 3D printing made it onto the itinerary of a DHL conference organized in 2010 and could affect the logistics business and its related real estate footprint worldwide.

A note to my colleagues in Winnipeg: a manufacturer named Kor Ecologic based in Winnipeg is working to build an electric car using a body printed out of plastic. It may be worth call to see if they require any additional space…

Natural Gas Market Activity Bodes Well for Western Canadian Commercial Real Estate

Calgary’s commercial real estate market continues to emerge from the lows witnessed 2009, spurred on by an increase of development and investment in Western Canada’s energy market. As the commercial real estate market in Calgary is directly correlated to energy investment in Western Canada, confidence in Western Canada’s energy market begets confidence in the Calgary real estate market.

Although the some of the largest recent investments into Western Canada’s energy sector have been geared towards the oil sands (Athabasca Oil Sands Corp.’s $1.35B IPO, Sinopec Corp.’s $4.65B investment into Syncrude Canada Ltd, or CPP’s announcement of a $250M investment into Calgary-based Laricina Energy), the single largest investment recently announced has involved our natural gas industry and was PetroChina announcing that they are going to acquire a 50 percent Interest in Encana’s Cutbank Ridge Business Assets for C$5.4 Billion. The assets cover 1.3 million acres of land, approximately 700 mmcf/day processing capacity, and 3,400 km of pipelines.

I find this an interesting announcement because PetroChina, a subsidiary of state-owned China National Petroleum Corporation (CNPC), will likely have incentives to develop the Cutbank Ridge lands that will run parallel with their interest in gaining exposure to long term North American shale gas plays. One such incentive is China’s own vast shale gas formations which they are looking to unlock with expertise they gain abroad. Another incentive is China’s current reliance on coal powered energy, which they are looking to dramatically reduce.

I think that in an era where expiry driven natural gas drilling has created a glut in the market and skewed typical supply and demand economics against drilling companies, a group such as PetroChina who is drilling/developing energy plays with long term socioeconomic motives will work to balance this skew.

Monday, February 21, 2011

Avison Young welcomes you to our Blog!

Welcome to the launch of Avison Young’s dynamic blog. Expanding on our commitment to social media and real-time communications with clients, employees and industry participants, Avison Young is determined to continue innovating and delivering value to the online real estate community. Whether it’s our use of Twitter to disseminate market news, listings and opportunities; our quarterly audiocasts to convey trends, research and market strategies; LinkedIn to connect with the industry; or video casts such as our latest contribution to CRE-Advice.com (which launched its first Commercial Real Estate Leadership Online Video Summit last week http://www.cre-advice.com/speaker_details.php?spid=19 ), we believe that internet-based communications are integral to the future of real estate services and information. Effective immediately, we expect to deliver daily content from a cross section of writers throughout the Avison Young family. The bloggers have been chosen to contribute content on local, regional and global real estate market trends, and represent a diverse cross section of perspectives. We hope you will enjoy the experience as much as we will enjoy blogging with you.

Saturday, February 19, 2011

Real estate transaction activity will continue to expand in 2011

It would appear that real estate transaction activity in the United States will continue to expand in 2011. We are already seeing a pronounced increase in debt availability, from traditional bank and insurance company sources as well as, dare we say it, CMBS lenders such as the investment banks. It also looks like the FDIC is finally getting in the game and readying some CMBS issues of its own from its extensive mortgage portfolios.

As the debt side returns, equity sources are also expanding but I’m not sure that’s all good news as asset supply (from sellers) hasn’t return to adequate volume levels. Even though property values in all asset classes and property types have rebounded by 20-30% from cyclical lows established in 2009, owners still expect value gains to come over the next 24 months. Only those will impending debt maturity issues seem willing to sell today…either that or they own property in NY or Washington DC where values have rebounded closer to values experienced in the cyclical high period of 2006/2007.

One final comment: The majority of the value accretion we saw occur in 2010 happened because of “the power of zero”, meaning a very low cost of borrowing (in other words, the banks have a near-zero cost of funds which is to some degree being passed on to borrowers who can, therefore, pay more aggressively for stable assets with secure cash flow). The leasing fundamentals which normally drive property values as rents and occupancy levels rise haven’t exactly come roaring back and likely won’t until a much clearer job-growth picture emerges and absorption occurs across all markets and property types. Stay tuned, as we are increasingly hopeful that the labor situation will begin to improve in the near term. In the meantime, well-leased properties in attractive markets will continue to attract significant equity interest due to the huge imbalance of capital supply relative to product availability.

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