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Tuesday, December 17, 2013

Reflections on Denver’s Robust Recovery

by Amy Erixon, Toronto


In November 2013, I had the occasion to visit Charlotte, NC and Denver in the same week and, despite a hectic schedule, managed to “weed out” some intriguing facts.

Charlotte, home of many of the “too large to fail” banks, works hard to appear conspicuously prosperous with a downtown of new gleaming skyscrapers; whereas Denver, the second-fastest-growing city in the U.S. and home to the “real economy,” is seeing a renaissance in redeveloped industrial buildings turned into mixed-use creative space, high-tech business incubators, and farmers’ markets housing young and middle-aged entrepreneurs.   Industrial neighborhoods ringing the downtown core are rapidly filling in with modern, industrial-style lofts and condominiums.  Over the last several decades, the urban renaissance, triggered in both cities by the construction of a baseball stadium and other sports venues downtown, has especially changed the face of Denver, which is younger, grittier and more ecologically oriented than both Charlotte and Calgary, the Colorado city’s cousin to the north.  Denver developers are shunning open parking lots in the downtown core for the hipper urban fringes where X, Y and boomer generations can co-exist more casually in modern and repurposed mid-density, mixed-use and transit served urban neighborhoods. 

I was in Denver for its annual Real Estate Expo, this year co-sponsored by Avison Young and the University of Denver.  Times are good in Denver.   A shallow housing recession, combined with an energy boom and high-tech surge, are fuelling growth – thanks in large part to Denver being home to the nation’s youngest, and one of its best educated, workforces.   What a surprise it was to learn that, with all of that going on, the fastest-growing industry in Colorado is, in fact, marijuana cultivation.   This industry has leased 3 million square feet of previously functionally obsolete space in the last nine months in the Greater Denver Area.   Colorado, like North Carolina, passed from a red state to a blue state in 2012.   At the same time, Colorado and Washington became the first states to legalize recreational use of the drug – possession of which is still a criminal offense under federal law.   In a deal between the federal and state governments, growing and distribution in states where it is legal is done under state supervision and licensing – hence the mini-real estate boom.

After researching the topic since returning to Canada, I have learned that Colorado has plenty of company.  Twenty U.S. states and the District of Columbia have either decriminalized possession of small quantities, or legalized medical use, or both.  As a result, marijuana is now the fastest-growing industry in America (eclipsing even smartphone technology applications) – and forecasted to grow 68% from $1.4 to $2.3 billion in 2014.  

According to recent Gallop and ABC polls, more than half of Americans now favor decriminalizing marijuana.   http://news.yahoo.com/first-time-most-americans-favor-legalizing-marijuana-poll-222023157--sector.html.    

According to the Globe and Mail, a majority of Canadians feel the same way.    http://www.theglobeandmail.com/news/politics/majority-of-canadians-want-to-loosen-marijuana-laws-polls/article14010389/. 

Uruguay may soon become the first country to officially legalize the drug.  http://www.theglobeandmail.com/news/world/uruguay-one-step-closer-to-national-marijuana-market/article15860115/

Which states have legalized medical use and/or decriminalized possession of small quantities might surprise you.    Some are obvious, like California, New York and Massachusetts, but some surprisingly conservative places like Nebraska, Arizona, Alaska, Montana, Mississippi, and, yes, even North Carolina have changed their laws in recent years.   To see the status by state, go to http://en.wikipedia.org/wiki/Cannabis_in_the_United_States.    Experts believe that marijuana could be legal in more than 20 states by 2018, fueling growth in sales to an estimated $10.4 billion in that time frame.  

In Colorado and Washington, the voters also elected to tax marijuana at the 25% level.  (Denver is putting another 5% surcharge on top of that.)  If the forecasted sales growth unfolds as anticipated, and local and state governments succeed in garnering such significant levels of taxation, we may well find increasingly favorable reception for such previously controversial initiatives.  Imagine the prospect of additional billions of dollars to invest in schools, municipal services and infrastructure, perhaps ensuring these locations stay at the top of the economic growth trajectory.

Now, that’s a Rocky Mountain high. 

Monday, November 25, 2013

When Opportunity Knocks

By Stan Yoshihara (Los Angeles)

Well, the day did finally arrive…As much as I tried to hang on and delay the process, in the end the opportunity was too good to pass up.  I’m not sure when I learned this great habit, but when the opportunity is real, you just have to take it.  How many times in the past did you kick yourself for not taking the opportunity, for passing up something that you really should have taken or done?  Too many times to count, right? Fear, rationalization, timing’s just not right, I have to finish this first, are all the reasons that we find not to take the chance.  I am living proof that it does work if you know who you are and what you want out of life.  I liken it to a great personal marriage, similar to what I have today, going strong at 28 years this past September…Why does it work? Here are some of the fundamentals:

  • Mutual respect and acceptance of each other, including flaws (nobody or nothing is perfect); 
  • Unconditional love (expect nothing);
  • Unconditional trust (no questions); 
  • Patience and tolerance (there will be times…);
  • Passion (be in love, like each other);
  • Forgiveness (you will make mistakes);
  • Have fun together (a must!)

So there you have it.  Simple right?  Relationship 101?  Not so simple.  You must have great discipline and complete bare nakedness honesty with yourself to make it happen.  The same can be said for your career too.  Apply the same fundamentals and I guarantee you will choose the right company to be with.  Know what you are good at; maybe more importantly, know what you are not good at.

By the way, it works.  In August 2013, I sold my company R7 Real Estate to Avison Young, the largest private and principally owned commercial real estate company in Canada.  I’m going into this one using some of the same fundamentals that I would have otherwise used in marriage or for that matter, in my daily life.

Wish me luck!

Wednesday, November 13, 2013

Hillwood Strikes Again

Hillwood Forms Massive New Industrial Fund

by Erik Foster (Chicago)

Foreign capital is continuing to work its way into US industrial assets in a big way.  Dallas-based Hillwood, the real estate and investment company owned by Ross Perot, Jr., is the latest to do so, again.  They have closed a new fund with a major sovereign wealth fund partner that is expected to deploy more than $1 billion into industrial real estate over the next four years.  More than half of the venture's $400 million in equity has already been identified and committed.

This is the second time Hillwood has worked with this sovereign wealth fund, which it chose not to disclose.  Their prior equity partnership was with the Canadian-based Brookfield Asset Management based in Toronto.  

This announcement continues to reinforce the strength of the industrial real estate market and the appetite investors have for this type of stable asset.  I expect their real estate investment to continue to expand in core markets and also into select Class B properties in key markets, such as Chicago, Southern California and New Jersey where Hillwood sees value; others are doing the same. (See our related white paper on Investment in Class B industrial assets.)

Hillwood announced a similar partnership with Brookfield Asset Management in March 2012. That joint venture, which also had an equity commitment of $400 million, said it expected to deploy up to $1 billion into industrial real estate within the first three years. 

In both cases, the very experienced experienced team at Hillwood is handling the acquisitions, developments, investments and management of the industrial properties.

Friday, November 1, 2013

Avison Young Presents Its Fourth Quarter 2013 Commentary on North American Commercial Real Estate Markets

By Mark E. Rose (Toronto)

Ongoing improvement in the United States real estate markets despite political distractions; Canada awaits impact but investment market activity remains strong. 

Here we are in the final quarter of 2013 and U.S. politics continue to capture the headlines - impacting not only the domestic, but also the international business community. The temporary shutdown of government services this fall erased $24 billion from the U.S. economy (according to Standard & Poor’s), leading to a downward fourth-quarter growth adjustment in GDP.

North of the border, the Bank of Montreal has already cut its fourth quarter outlook to 2.1% from 2.3%.  The full impact on the commercial real estate sector in Canada may not reveal itself until 2014. The impact of major geopolitical events on employment is always a concern, but for now, Canada continues to create jobs at a slow-but-steady pace. Coming off a strong 59,000 jobs created in August, Canadian employers created only 12,000 jobs in September. However, that was still in line with the average pace of 12,560 jobs per month this year, prompting the unemployment rate to fall to 6.9% -- its lowest level in almost 5 years. This monthly pace is roughly half of last year’s average of 25,860 jobs. Thus, while employment was up 1.2% (or +212,000 jobs) compared with 12 months earlier, the consensus is that the aforementioned U.S. shutdown may temper job growth in the near term.

For the office and industrial property markets, the good news is that hiring increased in the financial and natural resources sectors. The bad news is that hiring declined in manufacturing and public administration.

I would like now to switch gears and take a moment to address the topic of rising interest rates and the impact on commercial real estate investment activity. Noteworthy metrics are drawn from our recently published Fall 2013 Canada, U.S. Commercial Real Estate Investment Review, covering 24 regions across North America.

Canadian Highlights
 
Canada has exceeded pre-credit-crisis investment dollar volumes and pricing for most asset categories, while improving property market fundamentals continue to fuel investment activity in the U.S. There is no evidence that the recent rise in interest rates slowed activity on either side of the border in the first half of 2013. However, it will be interesting to watch the appetite of the biggest buyer group – interest-rate-sensitive real estate investment trusts (REITs), and whether they will be taking a break from their insatiable buying spree.

Robust demand and available capital for quality assets are evident on both sides of the border. Whereas Canada continues to be stable, if not at peak pricing, the U.S. seeks to improve if the politics of sequestration, government shutdowns and debt-ceiling limits do not prolong the delay in recovery. Interest rates will remain the wild card as U.S. tapering of bond purchases and the inevitability of inflation will impact both countries.

Slightly more than $14.4 billion (CAD) worth of commercial real estate assets changed hands in the first half of 2013 – up $1 billion, or 8%, compared with the first half of 2012.  Throughout Canada, industrial properties were the most actively traded asset class in the first half of 2013, outpacing the office sector with 24% of total first-half investment dollar volume. In all, $3.5 billion worth of industrial product sold at an astounding year-over-year increase of 92%. Industrial sales increased in every market.

Toronto, Canada’s largest city and commercial real estate market, remains the investment market of choice, recording $6.5 billion in sales (a 45% share of the national total), which was up 15% compared with the first half of 2012, beating the 8% national year-over-year growth in sales.

Although capitalization rates are lower on average than one year ago, further interest rate hikes may moderate or even signal the end of cap-rate compression for some property types. Cap rates are lowest for multi-family investments, and once again, Vancouver yields the lowest cap rates in every asset category except retail (which tied with Toronto). Financing acquisitions on a go-forward basis, however, will be tricky.

Canadian debt markets were very active in the first half of 2013, despite a couple of the larger institutional participants withdrawing as a result of meeting their allocations. The second half of 2013 will be tempered by the U.S. Federal Reserve’s actions on reducing market stimulus. Expect higher ‘all-in’ interest rates driven by deteriorating bond prices in anticipation of the Fed’s reduction of market stimulus. Lenders will be very conscious of funding deadlines in what we see as a potentially rising interest-rate environment.

The United States
 
Congress and the President’s recent resolving of the immediate debt-ceiling and budget impasse, and re-opening of the federal government, signal a positive turn for the economy. Wall Street and business have responded with some confidence. Nevertheless, we can look forward to further political debate in the fourth quarter as new deadlines loom in early 2014.

The Bureau of Labor Statistics reports that the number of unemployed was 11.3 million people and the unemployment rate was 7.3% in August. This is only a small improvement since our mid-year 2013 report, though down from 8.1% a year ago. Unemployment peaked in the U.S. in October 2009 at 10%.  The markets that added the most jobs in the 12-month period ending in July include:

1. New York, New Jersey and Long Island Metro, adding nearly 145,000 jobs
2. Houston adding almost 98,000 jobs, and
3. Dallas adding 90,000 jobs.
4. And for the 12 largest Metros in the U.S., Houston, Dallas, Atlanta, Boston and San Francisco all outpaced the national employment growth rate of 1.7%.

In all, we expect the U.S. economy to continue its modest growth through 2013. Constraints on construction overall, as well as an uptick in occupier demand, have led to improved market conditions in many metro areas. The 10.3-billion-square-foot office market posted a vacancy rate of 11.6% at the end of the third quarter – down from 10.7% in the second quarter. We expect that office will continue on its slow improvement path through year-end. In industrial properties, the average vacancy rate fell further during the third quarter of 2013 and ended the period at 8.3%. The 20.8-billion-square-foot market will see further improvement before year-end with new deliveries less than half the amount absorbed in the third quarter alone.

For the U.S. investment sales market, rising interest rates have failed to halt investor appetite for stabilized core properties, and office and multi-family sales accounted for 80% of the sales volume in Avison Young markets at mid-year.  Commercial sales rose primarily on the strength of multi-family sales. Sales in the first half of 2013 for office, industrial, retail and multi-family assets in Avison Young markets increased by 28% over the first half of 2012.

International capital still favors the U.S. Year-to-date, Canadian buyers lead foreign investment by far, purchasing roughly $8 billion of assets, according to Real Capital Analytics. In 2012, Canadian buyers completed transactions totaling $9.2 billion in the U.S.  Manhattan and Los Angeles have each captured more than $1 billion in Canadian capital in 2013, and Chicago and Seattle are the next top destination markets with $557 million and $501 million, respectively.

Three standout markets accounted for 47% of U.S. sales volume, among Avison Young markets, by mid-year: New York, Los Angeles and Washington, DC. Nevertheless, core buyers looked beyond their top acquisition markets and several U.S. markets registered notable year-over-year changes in sales volume including: Las Vegas + 73%; Orange County + 66%, Atlanta + 63% and San Mateo +56%. Look for further gains before year-end with overall sales volume likely to exceed 2012 totals.

For the full details and analysis, we invite you to visit and download the report from the Avison Young website.
 

Monday, August 19, 2013

Industrial Investment Activity Continues, Favorable Fundamentals

By: Erik Foster (Chicago)

We have seen consistently steady industrial investment sales activity across the country and I believe it will continue well into 2014.  Quantifiable leasing data as demonstrated by increasing rental rates and positive absorption are helping to shore-up assets that were once waning because of low cash flow and depressed rental rates.  These are indicators that the industrial market has stabilized and is poised for continued recovery in the latter part of 2013 and beyond. This is also driving investment sales activity as investors look for stable cash returns on core properties.  What’s more, they are looking for future yield from B assets that provide an opportunity to reset existing rents at much higher rates in the coming years; an industrial building with tenants who signed leases in 09 & 10 is looked upon very favorably by investors.

The increasing prevalence of class B industrial assets investment sales is a key investment trend to watch during the rest of 2013 and into 2014. A shortage of core product, significant demand from capital (both equity and debt) historically low debt pricing and expectations of the afore mentioned rental rate increases that could boost investor returns, are creating an environment that allow B assets to trade.  We are seeing this trend in the assets that we are selling across the country.  In fact, we are seeing these kind of investment being looked at by new money sources such as Canadian and international capital, causing further competition for product and higher pricing. 

The shift in focus for many to the Class B market is also due in great part to the large spread in cap rates between class A and class B product. Most class B transactions are trading near 8% cap rates and below in many markets.  This spread is historically wide, 200-250 basis points in some markets when compared to A product.  Also, A product returns are so low in comparison to B, even nominal moves in interest rates like we had recently can create a ripple affect in the buyer pool resetting these A deals to lower pricing levels, moving cap rates up, and further compressing the spread between A & B industrial assets.  

Wednesday, July 31, 2013

U.S. and Canada commercial real estate market highlights at mid-year 2013

by Mark Rose (Toronto, ON)

In both the U.S. and Canada, the recovery is progressing, but headwinds from fiscal constraint, tax increases and reduced spending at the federal and local levels are restraining growth to below normal levels. In the U.S., the combined uncertainty contributed by discussion of “tapering” by the Federal Reserve and delay in the implementation of Obamacare are adding to the uncertainty facing employers, and show up in disappointing job growth levels even as the stock market continues to push to new highs.    

Employment stagnant, but with bright spots
The Bureau of Labor Statistics released its regional and state unemployment summary last week and reported a national unemployment rate for May of 7.6% – virtually unchanged from what we reported last quarter.
                     
That said, several states demonstrated significant year–over-year improvement (from June 2012 to June 2013) and are worth noting: 

·         California’s unemployment rate dropped to 8.6% from 10.6%, the largest U.S. decrease;

·         Nevada dropped from an 11.6% unemployment rate to single digits at 9.6%, although the rate remains the highest among the United States;

·         Florida improved to 7.1% from 8.8%; and,

·         In New York, the unemployment rate fell to 7.5% from 8.7%.

 Tenants remain in charge, even as vacancy improves
As of the second quarter, many major U.S. office markets remain over-supplied with tenant-favorable conditions, even while tours and deal velocity have increased and several metro areas have moved into equilibrium.

Tenants are looking to control occupancy costs as they move, by employing collaborative work environments and reducing the overall-square-foot-to-employee ratio. With the ongoing tenant “flight to quality,” look for older vacant office properties to be converted to other uses, razed or substantially upgraded.

On the office side, vacancy for the 10.3-billion-square-foot U.S. market decreased to 11.7% at the end of second quarter – representing another quarter of ongoing improvement from levels just above 12% for most of 2012. Avison Young anticipates that vacancy will continue on its downward trajectory through year-end 2013. 

Meanwhile, the 20.8-billion-square-foot U.S. industrial market ended the second quarter with vacancy decreasing to 8.5% from 9% in the third quarter of 2012, with construction and deliveries below historical levels. In fact, in the first two quarters of 2013 alone, net absorption was more than double the amount of product delivered. The warehouse sector, comprising 18.6 billion square feet, stood at 8.1% vacant at the end of the second quarter.

Investment sales continue steady improvement, and Canadian investor appetite in U.S. grows
The U.S. investment market continues to improve this year, with sales volume through May of nearly $115 billion for all property types. This compares favorably to sales of $91 billion for the same period in 2012, and has increased each year since 2009 when January-May sales volume only reached $20.4 billion.

According to Real Capital Analytics, Canadian investors purchased $5.4 billion of U.S. assets year to date and are on pace to eclipse 2012’s transaction volume of $8.8 billion. Manhattan (with Canadian transaction volume of $988 million) and Los Angeles (at $897 million), have garnered the most Canadian capital thus far this year. Seattle, Raleigh-Durham and Atlanta round out the top five capital destination markets.
 
Now a look at Canada…

As we enter the “dog days of summer,” market fundamentals across most Canadian markets remain relatively stable. However, tight market conditions in major downtown office markets (Vancouver, Calgary and Toronto) are challenging for tenants as they are faced with limited space options and rising rental rates, even while favourable space and rental-rate alternatives are commonplace in select suburban markets (such as suburban Toronto), where demand has not kept pace with new supply.   

Additional supply beginning to impact vacancy in some market, but landlords still rule
We are currently finalizing our figures for Avison Young’s upcoming Mid-Year 2013 Canada, U.S. Office Market Report. Canada’s office vacancy rate finished the first half of 2013 just shy of 8% – a rise of almost 80 basis points (bps) from one year ago.
Canada’s downtown office markets collectively posted 5.6% vacancy compared with 5.2% last year. (In contrast, the U.S. downtown vacancy is coming in at 12.5%.) Given the current low vacancy rates in Canada, and with new supply in most markets 18 to 24 months away, especially in downtown core locations, landlords are constantly pushing rents higher.

Turning to Canada’s suburban markets, vacancy has jumped an estimated 130 bps to 10.6%. This is despite positive performance in Regina, Quebec City and Ottawa, which are posting vacancy well below the national average.

Developers are very active, with more than 21 million square feet (msf) under construction across the country – 4 msf more than last year, with Toronto and Calgary accounting for more than half of the total office space construction underway. Through the first six months of 2013, downtown is outpacing suburban office construction with each market segment having an additional 2 msf under development compared to one year ago. 

The heightened downtown construction levels in such markets as Toronto and Calgary are raising concerns over the markets’ ability to absorb not only the remaining new supply, but also the residual vacancy left behind by relocating tenants.  

Employment bumpy but trend is positive
Switching to the labour front, despite May’s surprising and massive 95,000 job surge, (which was the biggest gain in 11 years and just shy of the record of 95,100 set in Aug 2002), in June, employment was virtually unchanged with the unemployment rate remaining at 7.1%. In the first half of 2013, employment growth averaged 14,000 per month, slower than the average of 27,000 in the last six months of 2012. Over this 12-month period, employment grew by 1.4% (+242,000).

Investment volumes continue to increase
We haven’t finalized overall sales figures for the first half of the year yet, but the investment market in Canada remains busy. We can report first-half investment volumes for Toronto, a barometer for the rest of the country, with $6.5 billion worth of commercial real estate changing hands, up 15% over the same period one year ago. In the most recent quarter, sales volumes doubled for office, industrial and retail investments compared to the first quarter.

While Canadian REITs and Pension Funds continue to bid up assets north of the border, they also continue to deploy their growth strategies south of the border in markets such as Houston, Dallas, Atlanta, Phoenix, Seattle and Portland, to name a few.

The recent rise in interest rates (and bond yields) may curb capital flows and halt any further cap rate compression. This will certainly have an impact on the REIT sector where unit prices have come under pressure of late. We will be monitoring this situation closely as we move into the second half of the year.

We hope you enjoy the rest of your summer, and we look forward to helping you meet your real estate goals as we enter the second half of the year.

Tuesday, June 25, 2013

An Industrial Building, The New Shopping Mall

By Erik Foster (Chicago)

E-commerce has become the darling of the post-recession retail economy as online sales push past $225 billion, growing 15.8 percent in 2012 alone.  Going forward, the industry is expected to grow at a compounded annual average rate of 10 percent over the next five years, creating tremendous opportunities for owners and developers of industrial distribution space to capitalize on this growth.  The demand for industrial space will increase with the importance of the e-commerce distribution; conversely, this will be to the detriment of the retail sector, so investors must be aware.

One of the greatest benchmarks of the demand for warehouse and distribution space is the significant increase in the amount of occupied space. Since 2000 the amount of occupied distribution space has increased by 86.2 percent, from 459.3 million square feet to 855.1 million square feet at the end of Q1 of 2013.  While not all of the increase in occupied space was allocated to e-commerce, this change of almost 400 million square feet represents a significant average annual growth rate of just over 7 percent.  Conversely, during the same period the level of occupied retail space increased, but at a substantially lower pace, a paltry 1% annual average.  Since 2000 the level of occupied retail space increased 10.9 percent, moving from 5.6 billion square feet to a current level of 6.3 billion square feet.

The rational to invest into industrial product becomes not just an asset allocation, but an opportunity to gain another access point to the general public.  Industrial is becoming “consumer” real estate.  Although there is momentum with "on-shoring" of manufacturing in the US, e-commerce tenants really are the factories where the final assembly and shipping of goods occur.  Consequently, I believe the current trend of increasing speculative development, improving rental rates and strong demand from investors will continue within the industrial asset class for quite some time.  Furthermore, e-commerce will play a significant role in the national industrial product market, a sector that saw more than 151 million square feet of new development since 2010 at the height of the post-recession economy.  

For further detail and industrial capital markets analysis on this subject, please see my latest white paper E-Commerce Fueling Demand for Industrial Product.

Monday, June 3, 2013

The Houston Economy - Boom and Bust

By Rand Stephens (Houston)

The naysayers of Houston’s economic success like to point to the energy business as the main driver, and that the city’s economy is not diversified and subject to a collapse based on a drop in energy prices. This is an outdated view of Houston’s economy that dates back to the 80s.

There are now four economic power centers in the US. They are New York City for Finance, Washington DC for Government, Houston for Energy and San Francisco/Silicon Valley for Technology (the “Big Four”). Each of these centers are similar in that they have the infrastructure and intellectual capital that allow businesses in these industries to operate most efficiently by being in these locations.

While the common thought has been that cities with economic diversity are best from a real estate investment perspective, it appears that specialization is the way to go as it fuels growth and mitigates the downside when there’s an economic downturn. The Big Four are not only the fastest growing major markets in the US, they also have been the quickest to recover since the Great Recession.

The cause of the Great Recession was a debt problem...not enough of it, as the lending markets shut down; with everything so highly leveraged, it’s no surprise that we had a major economic meltdown..."live by the sword, die by the sword".

The Houston economy has recovered faster than the rest of the country because businesses, consumers and real estate weren't as highly levered as other places around the US. We've "been there, done that" in the 80s, and lenders have loaned cautiously in Houston since then.

 
The Boom and Bust reputation that Houston has endured since the 80s isn’t because our economy lacks economic diversity; it’s about debt, and the potential for getting over levered as investors look to ride the energy wave. So far, the lenders have remained disciplined and the city’s fundamentals look great.

Saturday, May 25, 2013

Observations from ICSC Las Vegas, 2013

By Amy Erixon, Toronto
 
The annual Las Vegas Shopping Center convention was a showcase for the degree to which advanced technology can be expected to profoundly affect the retail landscape in the years ahead. These trends are already having a radical impact on retail behaviour and players in the US, Europe and Asia. (For example, the subway walls in Korea are covered with scan-able advertisements to permit busy commuters to order on-line on the fly with their smart phone). Canada is a decade behind.
 
I’d like to focus on three themes for this report:

·         Disruptors –

o    Innovation is in full force every direction you look

o    Price elasticity, advertising and distribution are all being radically affected by smart-phone technology and social networks – on demand delivery of goods is available in England

·         Disruption–

o    Wholesale Turnover of over half of the Leasing Floor over the past 5 years- owners as well as tenants – the recession took a toll and technology will reshape it further

o    Playing catch-up, evolving business models, even Wal-Mart allows third parties to sell and distribute via its internet shopping channel – where 40% of shoppers pay with cash

·         Differentiation-

o    Go big or go home – Amazon is the cloud provider for both NASA and Apple, and their sales are expected to eclipse WalMart by 2017. Samsung is the largest grocer in Asia and will soon be offering financial products to North Americans. This is indeed becoming “Clash of the Titans”.

o    If you are small and not ready to quit - focus is on maintaining relevance, delivering personalized service and/or customization, controlling and promoting your brand and reinforcing via social media to maintain customer loyalty amidst a dive to the bottom on price.

Can you imagine crowd-sourcing your retail merchandising plan? Have you heard of a “pop-up store”? Would you consider attending social networking events at your local grocery and drug store or using a drive through internet pick-up window at Whole Foods to save time? These concepts are not new, but they are being employed by surprisingly traditional retailers who are enjoying some degree of commercial success, especially in rural locations (perhaps in some way connecting better and more locally with their customers ). Welcome to the brave new world in retailing that is unfolding.

This is not a matter of “clicks” vs. “bricks”. This movement is about integrating new media outlets and tools to drive traffic, obtain and manage data and operate as well as promote your stores (i.e. manage the customer experience). Not surprisingly, the traditional brands with the deepest catalogue history were the early winners in converting to on-line retail; they had the infrastructure and are accustomed to presenting and distributing merchandise remotely. But in recent years big names in internet sales such as Apple have mastered how to present physical stores with such a“Wow” factor they sell more hardware that is only compatible with their applications - which in turn drives market share across the entire cloud based platform. What’s next for Apple: a new TV device to revolutionize that media, one more venue to control what information and advertising you receive, in addition to directing how you use their devices to manage your world.

 As “big brother” as this all sounds, the consumer wins in many ways. First, at their scale these companies can really drive prices down, and choices up. Amazon offers free shipping on orders over $25, and generous return policies, lowering the risk of buying sight unseen. Several service providers like e-Bay offer apps to compare price and consumer ratings of products. You can use them right in the store prior to making a purchase (or to order the same item on E-bay for less). Teenage clothing companies are introducing bar codes you can scan on clothing items in the store to determine whether your friends or peers have “liked” the item or more importantly, already purchased one. In a time constrained world, having the luxury of few clicks on E-bay or Priceline from your laptop, tablet or smartphone to plan a vacation, buy tickets to a local concert, reserve a table at your favorite restaurant or pay your bills on-line means you might find the time to get that extra hour of sleep or second or third workout per week accomplished.

If you are a landlord, be mindful a great deal of disruption is ahead, both seen and unseen. As an industry the leaders are starting to think about how to capture on-line sales at point of source (have we already been dis-intermediated by Facebook and E-bay? We have witnessed the near demise of the bookstore, and the rise of stores that double as service centers by telecom providers. Stay relevant by ensuring your centers offer a “treasure hunt” experience, some entertainment as well as staples to get people to come and then stay. Help your retailers with getting up the curve, before it is too late.

If you are a retailer, time to educate yourself and get there fast. Your website may be more important than your storefront, and your prime advertising audience might have shifted venues while you weren’t paying attention. Think about how you will provide your customers with sense of “community” or unique, one-of-a kind products or experiences? Have you asked? Have you considered a rolling charity event or sponsorship or a celebrity make-over day? Is your store “cool”, and lastly, is it welcoming to people who are more interested in playing on their cell phone than talking to a person? Now is the time, get going!

Monday, May 6, 2013

Part I - Blog Series on Occupancy/Operating Cost-Savings for Non-Profits

Business Architecture by Dan Gonzalez (DC Metro)

I’ll be starting a new blog series on ways that associations, non-profits and other “dot-orgs” can reduce occupancy and operational costs in this tight economy. First, we’ll take a look at a relatively new trend in the business/corporate world and one that I feel could be of great use to non-profits and associations: Business Architecture (BA). There are several BA experts at Avison Young, including Will Travis here the Washington, DC area.

Business Architecture is defined as: "A blueprint of the enterprise that provides a common understanding of the organization and is used to align strategic objectives and tactical demands."
 
BA provides organizations with efficiencies and best results by mapping, diagramming and capturing all internal and external functions. The functions include an organization’s:
  • Structures
  • Processes
  • Mission
  • Personnel
BA fosters the framework to effectively and proficiently link together and align all of the organizational aspects, and thus, drive certain efficiencies and attendant operating-cost savings. The BA framework also supports the organization’s goals and ultimately delivers the best value to key audiences such as members and other stakeholders.

Tuesday, April 30, 2013

Houston Real Estate: What the Pros think

By Rand Stephens (Houston)
 
The recent RealShare Houston conference brought out great insights from some of the top real estate professionals in Houston. I had the good fortune to moderate the Town Hall Panel where we had a vibrant discussion about what’s in store for the future of Houston. Here are some key takeaways:
 
·         For the first time in 30 years upstream, midstream and downstream sectors of the energy business are hitting on all cylinders. Houston leads the US in annual job growth.
·         Market fundamentals are excellent and there is an undersupply of inventory in most product types.
·         Houston is now included in the new term “Salty Six”. The term refers to the top US investment markets that all happen to be coastal cities: New York, Boston, DC, Houston, LA, San Francisco.
·         Houston’s property valuations still look very attractive compared to other major markets.
·         Houston’s rental rates still look attractive for users compared to other major markets.
·         While the class A office market is thriving, the class B market offers great buys as the pros expect to see significant improvement in class B fundamentals with a shortage of class A space available for lease.
·         Many of the large office developments are being done by global energy companies using their own financial resources without involvement from the traditional developer.
·         Houston’s investment in mobility infrastructure is paying dividends, however, the live, work and play trend is alive and well like most all cities. People don’t want to commute and locations that offer quality housing, education, office space and amenities will do very well going forward.

Thursday, April 25, 2013

Industrial Class B Investment Market Recovery

By Erik Foster (Chicago)

Many Class A/Core industrial properties have traded in recent years, and we have been fortunate enough to be part of many of these transactions.  The shortage of new construction and continued investor appetite for stable returns is opening the door to a wider pool of assets which are attracting investors attention; the Class B industrial market.  The data continues to point to a national recovery in the industrial real estate sector, yet some investors across the country are shifting away from a focus on Class A buildings toward the Class B market as pricing for A properties becomes out of reach and availability to purchase these assets become scarce.  As a result, B industrial assets—which have in the near term been overlooked by institutional investors—will see increased activity from a wider pool of investors in 2013 as both debt and equity demand continue.

Furthermore, the industrial market is giving the multi-family sector a run for its money as the preferred investment vehicle for institutional investors. This is due to historically steady cash flows, low capital/tenant improvement expenditures, and positive macro-economic occupancy drivers.

We delve further into these subjects, provide some predictive points and data in our most recent white paper.


Sunday, April 14, 2013

Benchmark Data Confirming Economic Benefits of Green Buildings

By Amy Erixon, Toronto

Whether or not you believe in Global Warming, as real estate professionals we all can appreciate the value of controlling operating expenses for the benefit of both our tenants and owners.  But hard data has been elusive concerning the long term net economic proposition of “green building” design and operations; leaving the sale of these attributes difficult on their merits and more in the category of “politically correct” or “risk mitigation”.  The good news is, if you know where to look, broad based, longitudinal data is beginning to become available to quantify those benefits to owners and users of real estate.

At a recent RealPAC sustainability committee meeting Nils Kok, Associate Professor at Maastricht University, a Berkley visiting Scholar and co-Founder of GRESB (Green Real Estate Sustainability Benchmark) presented the results of the Benchmark study, commenced in 2007 and involving over 30,000 buildings on four continents.  Perhaps not surprisingly, North America (full of energy producers) is not at the forefront of this movement, politically or professionally.  However, even in North America energy producing companies are six times more likely to be a “green building” than Banks or major Law Firms, the largest tenant groups in Class A office buildings.  (Makes you wonder what the energy producers know but are not telling the rest of us).
Statistically, Buildings consume 74% of all energy consumed in North America and Europe, and roughly half of that is from commercial uses.  Bottom line is energy matters to the building industry and controlling it can make a major impact on occupancy costs.   Here are a few of the Key findings from the Study:

·         After 30 years, less than 10% of the standing inventory is Green rated
      ·         Green-rated buildings between 2007 and 2010 achieved, compared to the universe:

o    3% higher rents
                  o    7% higher net effective cash flow
                  o    13 % higher transaction values

·         $1 of energy savings translated into $0.95 higher rents and $13 psf higher value
        ·         Green-rated buildings had measureably higher occupancy levels and lower volatility of returns (note 75% were rated "Class A" vs. 25% of the general sample)

I was surprised by three things in the study, first that only 11 US states have more than 7.5% of their office inventory certified.  These states are the obvious California, Washington, Oregon, Massachusetts and Colorado but also included conservative bastions of Texas, Lousiana, Georgia and Virginia with Minnesota and Illinois rounding out the list. Second, I was surprised by the overall average age of the building stock in the hands of institutional investors, green buildings averaged 25 years of age and sample pool averaged 53, although taking renovations into account the sample was only marginally older at 26 years (this is measuring by number of buildings, not square feet).  Lastly, to date the finding is that although tenants will pay more for better performance (platinum status vs. gold for example), investors are not so willing.  Gold LEED standard has been the sweet-spot for achieving surplus value in institutional portfolios.
The purpose of Nils' visit was to make a plea to Canadian institutional investors to participate in the benchmarking study.  There is no broad inventory currently of Canadian buildings with Green ratings. With less than 10% of the global building inventory certified "Green" broader participation is very important to substantiating the accuracy of the Data, and measuring our own performance in energy efficiency design.


 

Thursday, February 28, 2013

Unique Mixed Use Development Announced in Downtown Calgary

By Walsh Mannas (Calgary)
3 Eau Claire is the third office tower development to be announced in downtown Calgary and is scheduled to start development later this year.  3 Eau Claire is a mixed use office and residential condominium development that has planned two multi-residential towers to be built on top of the office podium.  The development is located in the Eau Claire commercial node in the heart of downtown Calgary.  The announcement was covered by the Calgary Herald in an article this morning which can be found here.
Shaw Communications has announced they are going to take 12 floors in the development which will consist of the entire office podium.  3 Eau Claire will be an iconic development for downtown Calgary as the residential towers will be the tallest in the city and linked with a sky bridge on the 40th level.
We have long watched employers in the Calgary market work to distinguish themselves in the eyes of their employees through leasing innovative and high quality office space.  Shaw’s move to rebuild their downtown tower and take 12 floors in 3 Eau Claire is a great example of this as the space “will feature rooftop terraces, collaborative work spaces, a wellness centre, and the latest in environmentally sustainable building concepts”.
Shaw's decision to stay in the downtown core is in stark contrast to Imperial Oil choosing to relocate to Quarry Park in Calgary's suburban SE.  These two corporate decisions are great examples of Calgary's dynamic office market with each company choosing vastly different locations to attract employees.  One reality that is consistent in both these moves is that unique, high quality office space continues to remain sought after in Calgary's tight office market.
 

Wednesday, February 27, 2013

Avison Young named one of Canada’s Best Managed Companies for second year in a row

By Mark E. Rose, Toronto

On behalf of all our Principals, Shareholders and Employees, we are extremely proud to announce that Avison Young – for the second year in a row – has been named one of Canada’s Best Managed Companies. 

The prestigious national award is sponsored by Deloitte, CIBC, National Post, Queen’s School of Business and MacKay CEO forums. The announcement was made yesterday by the national sponsors and in a special report in the National Post daily newspaper.

Winning this prestigious award last year was a monumental achievement; winning again this year shows that our efforts to create a different kind of real estate company are paying off, and that we have established a solid, sustainable organization – one that is built to last.

We could not be more honoured to be associated with our exceptional clients, their belief in Avison Young and the extraordinary people who service their accounts and provide real solutions. 

This designation is a testament to the hard work and dedication of our employees, our tremendous growth in recent years, and our differentiated, Principal-led structure. Each Principal has a stake in the success of our firm, which drives a culture of collaboration, co-operation and client focus, across the company. We manage our business without service-line or geographic silos, in order to have a greater positive impact on our clients’ success.

This award is a recognition of our success with clients, our values, our accomplishments and our culture. Among the key pillars of the Avison Young culture are partnership, honesty and integrity. Through these values we have created a loyal base of clients. We applaud the accomplishments of all the Best Managed recipients for their commitment to excellence, and we look forward to continuing to build and sustain a culture that will enable our future success.

Established in 1993, Canada’s Best Managed Companies is a national awards program recognizing Canadian companies that have implemented world-class business practices and created value in innovative ways. Applications are reviewed by an independent judging panel that evaluates how companies address various business challenges, including new technologies, globalization, brand management, leadership, leveraging and developing core competencies, designing information systems, and hiring the right talent to facilitate growth.

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