2014 in Review: The Dallas Industrial Market

By: Greg Langston (Dallas)

This is the second post in our “2014 in Review” series. If you’d like to read the previous entry documenting the Dallas office real estate market, check back in the Avison Young blog archive.

Although we recently posted predictions for the future of the Dallas industrial real estate market, it’s equally important to look back and measure the year we just experienced. With strong leasing numbers, increased construction, and low vacancy rates, the Dallas industrial market had a decidedly strong year--one on par with the broad success of the Dallas commercial real estate market as a whole.

The most notable statistic for the Dallas industrial real estate market come in terms of construction. According to The Dallas Morning News, roughly 15.3 million sq-ft of industrial space were under construction during 2014--nearly double the amount under construction in 2013. What’s more, this impressive figure is the highest that the D-FW market has seen in over a decade.

These impressive construction numbers are balanced out by equally impressive vacancy rates. Vacancy rates remained relatively stable in 2014 at 5.8 percent--a solid number given the marked uptick in industrial construction over the course of the year. Similarly, according to the National Real Estate Investor, demand in the D-FW market is way up, which certainly bodes well for construction projects set to be completed over the next several years.

As touched on in a previous blog post, there is a bit of debate over how the market will fare over the coming years. On the surface, things remain positive: construction is on schedule, D-FW has a strong labor market, and businesses are increasingly interested in leasing industrial space. Regardless, demand is expected to remain steady or even fall slightly over 2015, which might place a damper on future construction opportunities as current projects come online.

Regardless, the industrial real estate market--as well as the Dallas real estate market as a whole--experienced a stellar 2014. With increased demand, low vacancy numbers, and a veritable boom in construction, the D-FW industrial market is widely considered one of the strongest in the country.

Will Houston's Office Rental Rates Decrease Dramatically?

By: Rand Stephens (Houston)

With the big drop in oil price, many companies in Houston are trying to make sense of what’s happening and how to respond. 

For those companies that are putting off facility decisions now to wait for a significant drop in rental rates, they may be sorely disappointed. 

Avison Young’s recently released white paper “The Price of Oil and Its Impact on Houston Rental Rates” shows that during the last three major economic downturns rental rates remained stable.  The paper presents a historical review of oil price and the correlation to Houston office rents. The three most relevant periods to examine are “The Asian Flu”, which lasted about one year between the end of 1997 through the beginning of 1999; the “Merchant Energy Meltdown” which in Houston’s case exacerbated a national recession that began with a stock market crash caused by the Technology sector in 2000 followed by 9/11; and, more recently, the Great Recession, which hit the Houston very hard in 2009. In all three downturns, contrary to popular thought, Houston’s office rental rates were not dramatically impacted.

   

Jeannie Tobin, Avison Young’s head of research in Houston and the author of the recently published white paper says, “judging from past recessions, a “wait and see” approach is not likely to benefit current tenants in the market with significantly improved lease terms.  For companies currently in the process of making long-term real estate strategic facility decisions that improve operations, or a company’s cultural environment, delaying that decision hoping to negotiate better lease terms,  may prove to be a mistake.  However, decisions involving non-core facilities, or expansions based on procuring future business, a “wait and see” strategy may be appropriate and should be evaluated on a case-by-case basis.”

Click here to view the full white paper.

National Industrial Capital Markets Update: Strong Secondary Market Continues to Draw Investors

by Erik Foster (Chicago)

As the push to secondary markets continues, our recent completion of a portfolio sale in Milwaukee on behalf CenterPoint Properties is indicative of this trend.  The stable Southeast Wisconsin market provides a snapshot of what we’re seeing nationally, as some investors move away from core industrial markets in search of higher yields.

This 10-building, 1.7 million square foot industrial portfolio shows the continued draw of stabilized, institutional grade assets in solid markets.  Our sale on behalf of CenterPoint is one of the largest industrial portfolio sales in the Midwest in recent years and follows our sale last summer of a 12-building CenterPoint portfolio, totaling 1.2 MSF near the Milwaukee General Mitchell Airport.

The Milwaukee-area industrial market continues to outperform many major markets in the country and has shown positive absorption over the past two years. It offers investors a stable market that is close to Chicago and central to the Midwest’s major transportation corridors. A lack of new construction and continued decline in the vacancy rate will allow many investors to find added value through strong rent growth.

The influx of capital is driving investment activity across the country as we continue to do work on transactions in other secondary markets such as Indianapolis, Charlotte, Seattle and Minneapolis.  The prudent investor who is looking for higher yields is looking outside of core markets such as, Milwaukee and other hot spots across the country.

Carbon Taxes May be Closer than you Think

By Amy Erixon, Toronto

If you haven’t been following the news on Climate Change, you may be surprised to learn that according to Wikipedia, 28 U.S. states have already adopted greenhouse gas mitigation strategies or action plans, including some unlikely places like coal mining centers: Kentucky, Tennessee, Pennsylvania and Montana, and conservative voter strongholds such as Alabama, Utah, Arizona and Iowa.  These actions include increasing renewable energy generation, selling agricultural carbon sequestration credits and encouraging efficient energy use.  

In the U.S. venerable statesmen including Reagan’s Secretary of State, George Schultz, former NYC Mayor Michael Bloomberg, and philanthropist Bill Gates are among those calling for action on carbon emissions.  The University of California chart above measuring CO2 levels over the past 800,000 years illustrates why.  For a good introduction to this topic I recommend watching the TED Talk featuring Bill Gates in 2010 on what he is doing about it called:  Innovating to Zero!

Here in Canada, politicians (other than the Prime Minister), economists and academics on all sides of the aisle, including the founder of the modern Conservative Party: Preston Manning, are calling for putting a price on Carbon.      Passed in British Columbia in 2008, the tax is being touted as a “success” by both industry and public opinion.  According to the latest polls, a majority of Canadians are supportive of more action on climate change (including nearly two-thirds of residents in Ontario.)   The Liberal Premiers of Quebec and Ontario signed an accord last November and are talking to British Columbia and three US States about joining their efforts - and taking action this year.  California Governor Jerry Brown, spearheading the effort suggests that in 2015 he anticipates several coastal provinces of China to also join the accord.   The specifics are expected to be unveiled at the climate change summit here in Ontario scheduled to occur in July to coincide with the Pan Am Games. 

The surprise outcome from the B.C. experiment comes from the fact that the Province has enjoyed strong economic growth since the tax came in to effect and carbon use has declined 16% over the same period; decoupling the GDP from its historical correlation with oil consumption.   The same results have been achieved over a longer period (more than two decades) in Scandinavia.   Here is some recent press coverage on these reports:

“The shocking truth about B.C.’s carbon tax: It works” – The Globe and Mail, July 9, 2014

“Because the tax must, by law in BC, be revenue-neutral, the province has cut income and corporate taxes to offset the revenue it gets from taxing carbon.  BC now has the lowest personal income tax rate in Canada and one of the lowest corporate rates in North America, too.” -  British Columbia’s carbon tax: The evidence mounts -The Economist, July 31, 2014

“Under an accord signed yesterday by leaders of the three western U.S. states and the Canadian province…Washington and Oregon agreed to adopt low-carbon fuel standards and the four governments said they’ll “harmonize” greenhouse-gas reduction targets for 2050.” - BloombergBusiness October 29, 2013

``A carbon tax maximizes the use of markets and minimizes complexity”, “a carbon tax is a better approach”… Imperial Oil Ltd. (Canadian division of Exxon) spokesman – Why Canada Oil Sands Industry Wants CO2 Tax - BloombergBusiness –February 1, 2013

If a carbon tax (or fee for use, as some politicians prefer it to be phrased) comes into effect, those of us in the real estate industry will feel its bite.  According to British Colombia, 11% of carbon tax revenues are coming in from the real estate sector as buildings currently represent 14% of all carbon effluents in the Province.  

According to the Petroleum Institute, the oil industry is already taking into account a carbon tax of between $30 and $40 per ton in its profitability forecasts.  Cynics suggest that the oil industry has joined the call for action for two reasons:  political expediency (to reduce resistance to fracking and pipelines) and because it is much more punitive on Coal than it is on Oil (in other words in a fight for market share).  Whatever the reason, if this highly effective lobbying body has indeed joined the call for a tax on carbon, it is closer than we think.