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Monday, March 21, 2011

Innovation in Illinois

By Michael Fonda (Chicago)

When the United States resumes its upward growth trajectory, we can expect that it will be fueled, in large part, by the companies operating inside the walls of The Incubator - Technology Innovation Center in Evanston, Illinois – named by Forbes.com as one of the “Ten Incubators Changing the World.” The Technology Innovation Center (TIC) was established by Northwestern University and the City of Evanston in 1986. During the past 25 years it has served more than 350 companies dedicated to early stage business development in two locations – 820 Davis Street, Evanston and 825 Chicago Avenue, Evanston.

Chuck Happ, real estate investor and owner of the office building that houses TIC, took me on a tour of his rather ordinary, brick clad, five-story building built in 1975. Although the building lacks the flash of today’s marble and glass clad, Class A office buildings, the tenants of the building are anything but ordinary. We stopped in to meet a couple of those tenants. Chuck introduced me to Alex Arzoumanidis, Director of Psylotech. In a space of about 1,000 square feet are punch presses, computer monitors and servers, CNC machines, and employees thinking hard about mechanical test frames for motion control devices. Danaher Motion supplies the base equipment; Alex and his team modify and augment that equipment. The linear actuator (now in the prototype stage) they assemble is sold to research & development labs that use it to test various materials.

Next we called on the founders of Precision Biomarker Resources - David Paul, Eric Bremer, and Jason Monroe. (Chuck is also a founder of this company.) David, Eric, and Jason are all trained molecular biologists. Precision Biomarkers is a contract research company for the life sciences industry conducting genomic micro array experiments, using the latest Affymetrix GeneChip Microarray platform. Precision Biomarkers run tests on samples of material provided by scientists in pharmaceutical companies or other research organizations on the human genome. The skilled technicians at Precision Biomarkers analyze the data, with the help of sophisticated equipment from Affymetrix, Labconco, Elga, MBL International and VWR, and transmit the analysis back to their customers who then create a drug that effectively and safely treats a specific disease. Without understanding how the drug impacts a person with a certain gene variation, that drug could adversely impact the recipient’s health.

Referring back to one of our previous blogs, “Democratization of Manufacturing”, we referenced Clayton Christiansen’s The Innovators Dilemma. You can understand the professor’s thesis walking the hallways of the TIC. Currently there are 48 companies located here. Over the last quarter, 14 new private sector jobs were created by these companies. Ensconced within the walls of the TIC are companies that will prove to be a disruptive or perhaps simply a complementary technology with “hockey stick” growth, fueled by innovative thinking and incubating at the TIC in Evanston, Illinois.

For more information about Illinois' commitment to the life sciences click here.

Buyers and Sellers Starting to Converge

By Walsh Mannas (Calgary)

It was not too long ago when I recall working with the Calgary Investment Team on a sales assignment to sell a newly constructed office building in Calgary, entirely leased to a government tenant on a 15 year lease, when we were confronted by prospects asking us what they were going to do with the property in year 16.

That was absolutely the low point in Calgary’s market. Headlease vacancy was rising, sublease vacancy was skyrocketing and no one seemed to have a solid grasp on just when the pain was going to subside. In this market the only product that was finding any traction was new, fully leased, well located properties.

The market today is different, almost entirely so. There are market participants looking for all asset types and for the first time all quality classes as well. Cap rates have compressed considerably, in the case of the most sought after asset type, currently retail properties, the compression has been well over 50 basis points.

We have seen an increase in demand for all asset classes due in part to the availability of financing on both the debt and equity side of the transaction. Interest rates remaining at or near historical lows have made capital abundantly available to most market participants and have filled the coffers of REITs all across the country.

This is a positive omen for the CRE market as this abundance of capital has entered the market while a number of owners are still reflecting on the illiquidity they witnessed during the downturn and trough of the market. Many of these owners re-evaluated their holdings during the crash and steadfastly know which properties carried them through the crash and which properties made them uneasy. It is this pairing of contrasting realities that I feel will create the most dynamic investment market we have witnessed since the peak in 2007.

Friday, March 18, 2011

Rumors and Myth Busting

By Mark Rose (Toronto) 

Most days I have the privilege of meeting with clients, our people, competitors, target companies and recruits. It is also true that my colleagues and I are aggressively growing our Company and have access to market information on a daily basis. By communicating with others, we stay on top of trends and information in the marketplace. What never seems to amaze me is the endless string of rumors about people and companies with whom we compete. Having just completed a tour of offices coast to coast in North America, I have met with individuals who spend too much time at the water cooler and on message boards and believe that every company is merging, selling or going bankrupt. The only rumor I haven't heard is Charlie Sheen is joining someone's Board of Directors to help with "Winning."

Myth #1: All majors are consolidating to create a Big 3. Simply not true. There are great companies at every level of this industry that thrive on their own and will continue to do so for the foreseeable future. There are also those companies that are struggling in this environment or have capital issues, and they will need to merge or sell to stay alive. But they are a select, unfortunate group.

Myth #2: Clients only want four or five major service providers. Partial myth. As corporate services continue to move through the procurement process and global procurement departments of major corporations are becoming decision-makers, two objectives are evident: 1) reduce cost; and 2) deliver value. Reducing costs can be accomplished by very large firms through economies of scale, but value is a very different animal and the "voice of the client" will tell you that clients want real strategic advice and that is the domain of the best – not the biggest.

Myth #3: Every roll-up or acquisition strategy is a process to build a platform and sell it. Absolutely false. Two of the largest companies in our space have grown exponentially by design and have every intention to stand alone. Speaking personally, this is where we differentiate Avison Young with the industry and are so excited about our strategic plan. It takes into account scale for the purpose of delivering for clients and employees as well as shareholders, but is a sustainable partnership model.

Myth #4: Everything is personal in our business. That is just wrong on so many levels. Great personal relationships with clients are augmented by great brands, and those brands are backed by great platforms and culture. Also, executives do not leave one company to "get even" with another. People join or start other firms because there is a better opportunity and a platform for success.

Myth #5: Every company with debt is going bankrupt. Nope, only the poorly managed ones.

Myth #6: Annually stated, every company and producer is having or will have their best year this year or next. We are an optimistic bunch, but...... well, you know the answer!

Thursday, March 17, 2011

Where Are the Contrarian Investors?

By Amy Erixon (Toronto)

Investors everywhere seem to be bemoaning the fact that pricing for prime properties is exceptionally competitive, in many instances it appearing to be well ahead of local property market fundamentals.

But this really should come as no surprise. According to the recent IPD (International Property Databank) sentiments survey of contributing global investors, more than 90% of respondents are primarily focused in 2011 on making core investments, a similar percentage seen in 2010 and 2009. By comparison, in the years leading up to the crash, investors were pursuing a variety of strategies, endeavoring to match risk and return characteristics and in doing so achieve attractive returns. The fact there is a growing sense that the focus on core properties is be pushing valuations into a range that might be disappointing in the medium to long term begs a couple of questions.

First, how do you identify the crossover point where a trend is played out and loses momentum? Second, what is the appropriate long term valuation spread between bread and butter middle market investments and large scale investments in the largest cities? And lastly, why are value creation strategies failing to attract significant interest from global investors?

We are beginning to hear stories about property flips in the most coveted markets, with reports of 50% or higher gains on properties held a year or two where no improvements have been made. This will likely attract enhanced investor interest in those same core markets, supporting the current wave of relatively high valuations in the near term.

It's widely demonstrated that prime properties offer stability of returns and capital values that are difficult to replicate in other investments. The steady demand for these investments (capital push) from large global institutions has insured that this tenet has been a self-fulfilling prophecy. But as valuations slide into ranges that fall far below most insitution's actuarial cost of capital, it is helpful to recall that capital stability is only one of the attributes that savvy investors have enjoyed from property investments in the past. Outsized capital growth is also available at specific times in the recovery cycle and we might be at the inflection point of that strategy for a broad range of property types, locations, sizes and quality characteristics.

Well timed and well conceived projects will perform in the long run. It is equally true that poorly timed projects and existing properties with reposition potential represent outsized return opportunities for investors and managers with the expertise and patience to tease out the value spread available for doing the work to move these investments to core.

It's little wonder that between bumpy recovery statistics and ongoing political and geological shocks investors continue to shun risks. But does that mean that this is the optimal time to take measured risks in our property investment strategies?

Saturday, March 12, 2011

Free Markets and Sustainable Economic Growth

Francis Fukuyama in today's WSJ, "Is China Next”, discusses the chaotic state of affairs in the Arab world and what may or may not be on tap for China. As you can read in the following quotes from Fukuyama’s article, revolutions begin when leaders continually abuse the rights of their citizenry. When the rule of law is obliterated, economic growth will eventually stagnate, whether authorities want to metaphorically “put their foot on the neck” of BP or actually “put their foot on the neck” of Tunisian vegetable cart peddler, Mohamed Bouazizi.

I recently finished reading the book, Everyman Dies Alone, which is a fictional account, set in Hitler’s Germany, of an actual and very ordinary Berlin couple who took on the regime in a very simplistic manner. They distributed postcards throughout Berlin, on which they printed messages excoriating Hitler and his henchmen. I wondered, as I read this book, how the protagonists, Otto and Anna Quangel, would have changed history if they had access to Facebook and Twitter.

Because today's "rebels" are adept at using social media, eventually the time will come when oppressed vegetable cart peddlers like Bouazizi, living under authoritarian regimes, will be free to grow their businesses into customer centric grocery stores and eventually into highly efficient grocery chains employing thousands of people and serving their customers within the safe harbor of a free-market.

Here are three excerpts from Fukuyama’s article that I really like. If you want to read the entire article, click here.


“The incident that triggered the Tunisian uprising was the self-immolation of Mohamed Bouazizi, who had his vegetable cart repeatedly confiscated by the authorities and who was slapped and insulted by the police when he went to complain. This issue dogs all regimes that have neither the rule of law nor public accountability: The authorities routinely fail to respect the dignity of ordinary citizens and run roughshod over their rights. There is no culture in which this sort of behavior is not strongly resented.”

“The Chinese government is also more clever and ruthless in its approach to repression. Sensing a clear threat, the authorities never let Western social media spread in the first place. Facebook and Twitter are banned and content on websites and on China-based social media is screened by an army of censors. It is possible, of course, for word of government misdeeds to get out in the time between its first posting by a micro-blogger and its removal by a censor, but this cat-and-mouse game makes it hard for a unified social space to emerge.”


“The hardest thing for any political observer to predict is the moral element. All social revolutions are driven by intense anger over injured dignity, an anger that is sometimes crystallized by a single incident or image that mobilizes previously disorganized individuals and binds them into a community. We can quote statistics on education or job growth, or dig into our knowledge of a society's history and culture, and yet completely miss the way that social consciousness is swiftly evolving through a myriad of text messages, shared videos or simple conversations.”

Friday, March 11, 2011

Real Estate and British Columbia’s Coastal Forest Industry

Some of the largest land sales to occur in Metro Vancouver over the past decade were those of large parcels owned and used by the Coastal Forest Industry. Some examples are:
  • Weyerhauser selling 23 acres in Delta for $15,000,000 in June 2010
  • Canadian Forest Products selling 45 acres in New Westminster for $44,670,000 in February 2009
  • International Forest Products selling 49 acres in New Westminster for $30,100,000 in August 2009
  • Western Forest Products selling 39 acres in New Westminster for $40,910,000 in March 2008
  • Western Forest Products selling 16 acres in Vancouver for $13,525,000 in December 2006
  • Western Forest Products selling 18 acres in Vancouver for $12,000,000 May 2005
  • Canadian Forest Products selling 42 acres in Vancouver for $21,158,000 May 2002

Many of these sales were to a federal body, Port Metro Vancouver, which is Canada’s largest and busiest port. These lands will be utilized as strategic assets of the Port going forward.

This week The Economist published an article titled Canada's lumber industry: If you go down to the woods You’ll find a Chinese surprise which briefly outlines the ongoing dispute between Canada and the US on the trade of lumber between the two countries. Historically the US has held the upper hand as they accounted for majority of Canadian exports; however within the past two years 24 mills throughout British Columbia have reopened to service demand created in China due to government and industry marketing efforts in China. Some industry insiders also attribute the growth to a 25% tax Russia added to log exports in 2008, which is detailed along with Canadian and US efforts to foster Chinese demand for forest products in a recent article in Pallet Enterprise.

Where am I going with all this? If US demand rebounds and Chinese demand continues to grow, British Columbia’s forest industry could face a boom, which would undoubtedly bring about a revival for the coastal sector of the industry. However, with so much of the lands used historically for production now dedicated for port use, where will the logs be processed? Luckily there is still capacity, on the outskirts of the Metro Vancouver region (Surrey, Langley, Pitt Meadows, Maple Ridge, and Mission) where land prices are lower and did not spur sales at record numbers as they did closer to the core. These properties are either in mothballs or riding out the downturn with a few up for sale with muted interest. Not so surprisingly, some of the groups actively kicking tires are from China.

Thursday, March 10, 2011

Big News, Big Deals, Big Money

As further proof that capital is abundant in the US commercial real estate markets, some big deals have recently been announced which reflect: (1) the continued imbalance of capital supply relative to product availability, and (2) the high values attributed to public entities which are using their capital to purchase assets and enterprised accretively. Two large healthcare deals have been recently announced, Ventas purchasing Nationwide Health Properties for around $5.4BN and Healthcare REIT purchasing Genesis Healthcare for approximately $2.4BN. Accretive acquisitions like these are excellent ways for public vehicles to use strong equity currency to purchase large portfolios accretively for their shareholders. Witness CBRE's acquisition of ING Clarion's non-US asset management business for $940M as yet another example.

Similar stories are playing out in the single asset arena as well with major office and hospitality assets in New York and DC trading at multi-hundred million dollar levels to both public and private equity investors. Barring some economic stumble, such as renewed exectations of inflation and rising interest rates, this trend toward large, coastal market-centric, transactions should continue and public entities such as REITs will be using their strong equity to facilitate such transactions.

Wednesday, March 9, 2011

Investment Rebounds in Calgary's Commercial Real Estate Market

Avison Young’s 2010 Investment Review highlights and confirms what we have witnessed in the Calgary commercial real estate (CRE) market for a number of months now, which is a reignited interest in investment product of all sorts, including properties with varying and divergent risk profiles.

Total investment in the Calgary commercial real estate market in 2010 was $1.8B, up 30% from 2009, with the retail sector accounting for the largest volume component at $666M. The increase in activity is directly correlated to the abundant supply of debt in the market at historically attractive rates. Furthermore, stability in the leasing market of all major asset classes has renewed fervour in Calgary’s CRE market to a level not seen since the peak years of 2006/2007.

Since 2009, interest in Calgary’s office investment market has been focused on top-quality assets with predominantly low risk profiles. This focus was driven by scepticism in Calgary’s leasing market which seemed to be waiting for a 20% vacancy to hit while net effective rates continued to plummet. As the Avison Young Q4 2010 Office Market Report explains, these projections have proven to be inaccurate as Calgary had an incredible amount of absorption in 2010. Although vacancy will creep up over the next two years, as the last of the downtown office developments come on stream, almost across the board market participants are revising their vacancy projections downwards towards Calgary’s historical norms.

What I find most telling of the quality and strength in Calgary’s CRE market today is the breadth of investors looking for value-add opportunities, and the willingness of these groups to take on short term vacancy and/or lease rollover risk. This is an occurrence that the Calgary CRE investment market has been practically void of since the downturn in late 2008 and one that I see as a harbinger of positive news for the market.

Monday, March 7, 2011

The Great Recession: How to invest going forward

Two books I highly recommend reading are Too Big To Fail by Andrew Ross Sorkin and After-shock: The Next Economy And America's Future by Robert Reich, former US Secretary of Labor and currently a professor of public policy at UC Berkeley. Too Big To Fail is a riveting story of the events leading up to the near collapse of the US financial system and the moves Paulson, Geithner and Bernanke made to stabilize the system. Robert Reich wrote After-shock in response to the economic crisis and it is his plan for restructuring the US economy and reshaping our politics to bring a broader and more sustainable prosperity to our country.

Robert Reich makes some interesting points, one of which is that the wealth in the US has become too concentrated. He believes this to be problematic because it creates a surplus of capital searching for investment returns that ultimately creates speculative bubbles followed by the inevitable crash. He backs up his theory with a statistic that in 2007 (the year before the Great Recession) and 1928 (the year before the Great Depression) the share of total US income going to the top 1% wage earners peaked at an all time high of over 23%.

In reading Too Big To Fail, one thing that is very obvious to me is how our financial system is tightly controlled by a relatively small group of people that have an incredible amount of power, mainly the Treasury Secretary, the Chairman of the Federal Reserve, the Chairman of the NY Federal Reserve and the CEO's of the major financial institutions. With less major financial institutions now than before the economic crisis, it appears the power is even more tightly controlled than before the crash.

Whether Wall Street has the financial game "rigged", and/or the problem is the "rich getting richer", as Robert Reich would have us believe, it does appear, for whatever reason, these speculative bubbles and subsequent crashes are happening more frequently.

What will be the next bubble to burst...perhaps US Treasuries? The real question is how to protect oneself going forward from the wild fluctuations which may becoming more the norm than the exception. One way may be to dial back return expectations and get back to the basics of investing. For me, that means investing in things that actually cash-flow and produce a real cash-flow return to the investor over the life of the investment. So many investment opportunities that I see have no cash-flow and are based solely on future expectations. With Excel and a good set of assumptions, any investment can look great by projecting a terminal value that generates an eye-popping internal rate of return.

I think the key is to find investments that have a stable cash-flow return, then if there's a major market correction, I can hang-on, clip my coupon, and wait patiently for the market to recover.

Thursday, March 3, 2011

The Importance of Pre-Marketing Due Diligence and China

I am currently working on two sale assignments which have highlighted the importance of conducting the proper pre-marketing due diligence when selling any commercial property. Most items should be addressed by a good broker; however in many cases getting the right materials together requires some upfront costs to be borne by the vendor. These can include:

  • Commissioning a site and building survey for the property, especially for older properties where the original plans are unavailable or in poor condition; and,
  • Completing a building condition report, especially when a detailed maintenance history of the building systems and major capital replacements (eg roof) are not available.

Having this information will lead to more effective marketing materials that will garner greater interest from more purchasers in less time. When prospective purchasers have this information on hand prior to making an offer they are more likely to offer at a higher price, require less due diligence items and time, and in competitive situations be more willing to offer unconditionally.

I believe that in all cases this will benefit the vendor by resulting in a higher sale price (more than enough to offset upfront fees for surveys and reports), requiring less time and resources after an offer has been accepted and leading up to condition removal, and a smoother transaction overall with a lower likelihood of unwanted “surprises.”

I conclude my post this week on a totally unrelated subject by sharing a few points made by Evan Osnos, a staff writer for The New Yorker living in Beijing that caught my attention. During an interview on The Colbert Report this week, Mr. Osnos noted:

  • Many Chinese will take a three day train ride without a seat to find a job.
  • There are more children learning English in China than there are in the U.S.
  • There are more cars in China than the U.S. and only 3% of Chinese can drive a car.

Just sayin…I think this is more noteworthy than Charlie Sheen.

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