Thursday, April 20, 2017
By Amy Erixon and Rodney McDonald (Toronto)
As weather patterns become increasingly difficult to predict, and extreme weather events begin to wreak greater havoc on buildings across the globe, the time has come for all real estate investors – not just a few developers or institutions – to incorporate sustainability into their investment decision-making process.
If you’re still wondering if such a shift in thinking is worth it, consider these facts:
More clients and tenants looking for sustainable real estate
If you operate a real estate investment management company, you likely field questions regularly about sustainability options. This situation arises because many investment funds – such as the Healthcare of Ontario Pension Plan – today have their own investment sustainability criteria that guide their investment decision-making process across diverse assets, including real estate, stocks and bonds.
Similarly, many tenants are increasingly attracted to green buildings. In a recent PGIM survey, 78% of tenants said that energy efficiency and green building operations are either important or very important to them.
Sustainability has positive impact on returns
Yes, more sustainable buildings are good for the environment – but they’re good for investors’ bottom lines, too. A 2016 study by Drs. Nils Kok and Avis Devine, published in the September 2016 issue of the Journal of Portfolio Management, looked at 10 years of financial performance data for landlord Bentall Kennedy’s North American office portfolio. The study showed that by reducing energy consumption by 14%, the company was able to increase renewal rates (5.6%), tenant satisfaction (7%), rent (3.7%) and occupancy (4%) – and decrease concessions 4% as well.
In today’s era of rapid social, economic, global and geopolitical change, it’s essential to do your due diligence when acquiring and managing an asset. While many investors and investment management companies use data to guide their decision-making process, they often continue to overlook climate data. Such an omission could be costly down the road. Using climate maps as data points today can help you protect your long-term returns – for example, by helping you to identify areas prone to flooding and take proactive measures to mitigate the financial impacts of severe flooding on your real asset portfolio.
Such foresight will not only help protect your building(s) from environmental damage in the future, but also allow you to avoid higher insurance premiums.
(Amy Erixon is a Principal of Avison Young and Managing Director, Investments. Rodney McDonald is a Principal of Avison Young and leads the firm’s consulting and project management services in Ontario. He also leads Avison Young’s Global Citizenship affinity group, implementing the firm’s corporate social responsibility, sustainability and philanthropy strategy. Both Erixon and McDonald are based in Toronto and can be reached at (416) 955-0000.)
Posted by Rodney McDonald, AY Toronto at 5:46 PM
Sunday, April 9, 2017
By Susan Thompson (Calgary)
While not a widely analyzed or recognized economic indicator, the annual Calgary Stampede tarp auction for the chuckwagon races is a solid indicator of business confidence in Calgary.
Chuckwagon racing is one of the most exciting events held annually at the Calgary Stampede, with teams vying for more than $1 million dollars in prize money. Every year, businesses bid on the opportunity to be a sponsor for, and have their logo displayed on, one of the chuckwagons participating in the GMC Rangeland Derby.
Because Calgary’s economy is so strongly tied to the world price of oil, WTI crude oil is one of the most tracked commodities locally. When WTI prices are high, the economy booms. When WTI prices are low, things slow down substantially. As a result, the total amount spent each year on chuckwagon sponsorship packages actually ends up tracking well for economic confidence in the Calgary market.
The monthly average WTI spot price was $30.32 per barrel in February 2016 and $37.55 per barrel in March 2016, while the spot price for February 2017 was $53.47 and $47.70 at close on March 23, 2017, the day of the auction. The total spent on the chuckwagon tarp auction for 2017 was approximately $2.4 million, a better result than the $2.3 million total for 2016 and the low of $1.7 million recorded in 2009.
While recovery remains a long way away, it would appear that thanks, in part, to the recent increase in oil prices, confidence is increasing in Calgary’s business community. It is hoped that this confidence can be maintained and strengthened in the months to come.
(Susan Thompson is the Research Manager in Avison Young’s Calgary office.)
Posted by Blog Administrator at 9:23 PM
Thursday, March 23, 2017
By Ronan Pigott (Vancouver)
I recently felt compelled to write this post due to the fact that, on a very regular basis, I find myself explaining to people outside of the commercial real estate circle exactly what my colleagues and I do for our clients.
One of the most common misunderstandings is the comprehensiveness and value of a quality tenant- representation service. Fundamentally, tenant representation is based on attaining the optimum result for a tenant’s office lease. To do this, a tenant must have access to the most up-to-date market information, while also having the ability to leverage the right skill set to negotiate with the modern-day landlord.
In Metro Vancouver, as in most large North American cities, office buildings are owned and/or managed by large sophisticated private entities or institutional groups such as real estate investment trusts (REITs), insurance companies, or pension funds. Whether dealing with an existing tenant’s renewal or with a new tenant during a lease transaction, the landlord’s goal is always to maximize shareholder return.
To do this, prudent landlords will arm themselves with the tools required by way of expert representation and extensive market research. The obvious question: If a professional landlord is taking these necessary steps, why wouldn’t a tenant do the same?
What does comprehensive tenant representation include? Although site identification is fundamental, with the amount of information offered online through a multitude of websites, it doesn’t take a high level of skill or professionalism to prepare a list of potential locations. Exploring the market with the sole parameters being size and location rarely renders the optimum locations. Two of the most common considerations that are often overlooked are ownership structure and the building’s tenant profile.
The modern landlord community consists of many different ownership types. What type of ownership is the right fit for you, the tenant? Let’s explore a hypothetical scenario. You identify an opportunity in an office building owned by a local investor with few commercial holdings. Although this particular landlord is one of the most diligent and reasonable landlords in the market, it doesn’t necessarily mean that this ownership type will be the best fit for you.
This is a big move for your organization and it is intended to be a long-term commitment. In order to make this premises work for your organization, extensive improvements and customizations must be made within the interior of the space at a considerable cost. It is often the case that this type of landlord, as opposed to a larger or institutional landlord, will be reluctant to contribute financially to a tenant’s specific build-out.
It is not necessarily the case of local investors being unreasonable – these landlords may simply not have the necessary access to capital. Should you wish to have a significant portion of your office improvements financed by a tenant improvement allowance, you may need to focus on an alternative building set where the overall deal structure will be a better fit for your specific situation.
Flexibility is, arguably, the most important factor when considering a long-term lease commitment. Growth and contraction plans are typically at the forefront of most progressive organizations’ business planning. At face value, one would think that the larger the building or complex, the greater the level of scalability, which offers the required flexibility. But it often soon becomes clear that it is not always the case.
The tenant profile within a building will dictate the flexibility of an incoming tenant’s tenancy. Many prospective tenants assume that a large building will automatically accommodate their expansion plans due to its size and many moving parts. Often overlooked are the many pre-negotiated rights that are likely scattered throughout the building by a number of existing tenants. These rights can dramatically change the perceived future flexibility available to incoming tenants. You may have the ability to negotiate terms on future expansion plans but, more importantly, where do you fit in the tenant lineup?
Comprehensive due diligence on the existing rights of all tenants within a building is essential – but often overlooked. Whether overlooked or not fully understood, the effects can be severe.
Looking at the tenant representation service on the surface, it is a three-step process in the order of strategy development, site identification and lease negotiations. A comprehensive service requires detailed analysis of each of these three steps. I gain the most amount of satisfaction watching the process unfold and our clients discover and understand the value of tenant representation – not only the value-added benefits from a financial standpoint, but the often tough-to-quantify value of time savings and stress mitigation.
This value enables our clients to do what they do best: Focus on their core business.
(Ronan Pigott is a Vice-President in the Vancouver office of Avison Young, specializing in office leasing. This blog post originally appeared as an article in the October 2016 edition of Western Investor, a Vancouver-based commercial real estate newspaper.)
Posted by Blog Administrator at 6:05 PM
Friday, March 10, 2017
By Mark E. Rose (Toronto)
After competing against some of the nation’s top firms in all business sectors, we are thrilled to announce that Avison Young has been named one of Canada’s Best Managed Companies for the sixth consecutive year, and attained Gold Standard status for excellence in business performance for the third straight year.
This award is a testament to the success of our Principal-led ownership model and the dedication of our entire talented workforce. Ultimately, this award shows that our success is not only about high sales and transaction volumes, but also about treating people fairly, respecting the importance of their properties and goals, and giving back to the community.
This award also demonstrates that our company’s values, collaborative culture, client-centric approach, and dedication to sustainability are resonating not only in our industry but all business sectors. Although we have achieved widespread growth, we are still using a model that speaks to clients and top talent, and we are differentiating ourselves from all other commercial real estate service providers. We are grateful for this recognition and salute all new and repeat winners.
Deloitte/CIBC have officially announced the winners in MacLean’s magazine and Canadian Business www.canadianbusiness.com/bestmanaged
Canada’s Best Managed Companies is one of the country’s leading business awards programs recognizing Canadian-owned and managed companies for innovative, world-class business practices. Applicants are evaluated by an independent judging panel made up of judges from Deloitte, CIBC, Canadian Business, Smith School of Business and MacKay CEO Forums. www.bestmanagedcompanies.ca
We couldn’t be more proud to have the opportunity to celebrate this award with our clients, partners and employees who help us grow every day.
Mark Rose is Chair and CEO of Avison Young
Monday, February 27, 2017
By Amy Erixon, Toronto
In April 2016 I wrote a blog entitled “Implications of Rising Protectionism on the Real Estate Industry”. This post is a continuation of that discussion. Sweeping changes are being proposed to US tax, immigration and trade policies with a stated goal of invigorating the US job market. It is hard to say what programs and features will actually see the light of day when all is said and done, but we know for certain, there will be winners and losers, and that experiments have consequences.
The most dramatic aspects of the current plan include a significant shift in tax burden from income to consumption taxes via border tariffs; a 100% investment deduction up front on plant and building investments; and third the limiting of interest deductions (other than home mortgages) to the amount of interest income. All of these measures have considerable implications for US property markets whose equilibrium pricing has been shifted much higher thanks to central bank subsidized interest rates and the huge influx of foreign capital which reached $87.3 billion in 2015, up from less that $5 billion six years earlier. KPMG notes in their June 2016 report on the House Republican proposed tax reform that "In addition to WTO compliance concerns...a move from an income tax to a consumption tax effectively could void the current network of US treaties." This would obviously raise liquidity concerns. The investment deduction change could dramatically affect a tenant's inclination to own vs. rent, and will likely spawn a flurry of financial products to transfer the tax savings benefits between parties. We should not forget about the last time this was tried. Repeal of accelerated depreciation rules in 1986 triggered a 7 year real estate crash, (and caused the savings and loan crisis) as financially engineered property investments, whose primary goal was to provide tax shelter, imploded.
HOW TARIFFS WORK
The claim of tax neutrality hinges on the expectation that revenues lost would be replenished by border tariffs. For those of us who could use a refresher on tariffs: Tariffs are taxes on imported goods and services, imposed by governments at the border, traditionally for two reasons: 1) to protest violations of standing trade agreements, 2) to temporarily protect domestic industries unable or unwilling to compete with foreign competition. Tariffs restrict trade, and reduce overall economic activity by increasing price to consumers. This chart illustrates how it works: units sold is on the “Y” axis and price is shown on the “x” axis. Consumer behavior is shown in red, decreasing as prices rise. Light green and light blue areas show redistribution effects of the tariff. In this example, where consumer demand is tied to price, total economic activity is reduced by $50 million, domestic producers gain $50 million of sales, foreign producers lose $175 million, and the consumers pay $300 million in additional taxes to the government.
The asymmetry of results is one reason why tariffs are universally unpopular and considered a tool of last resort. For a more complete treatise on tariffs, follow this link to an article written by faculty at the University of Washington: https://faculty.washington.edu/danby/bls324/trade/tariff.html.
Taxes are a domestic affair, and the congress will decide who will pay more and who will pay less, and in the process create winners and losers, but trade and deportations are another matter (and much more in the hands of the President). In the past when mass deportation has been tried, the adverse effects have shown up most strongly in housing construction and agriculture, both of which industries are also highly reliant on interest deductions. Businesses reliant on foreign workers (or an integrated supply chain) are forced to pivot into other pursuits where automation can replace human labor, or goods may be substituted until the time new factories and/or supply chains can be built - for example growing nuts vs fruits, or selling software instead of smart phones. Most US businesses are affected by trade and tariffs will cause considerable dislocation both for these businesses and for their customers. In addition to depressing economic activity and hurting consumers, trade wars, whether via tariffs or deportation are not unilateral. They have a tendency to escalate into counterproductive parry and counter parry as relations between countries quickly deteriorate, and domestic security is undermined.
The US tax code is unnecessarily complex and is widely considered to be unfair, reforms are needed. And rethinking trade has gained considerable popularity in the most recent year, but consequences are far greater and less predictable. Let’s hope that there is deep study and reflection of unintended consequences prior to implementation of some of these proposals and an adequate phase-in period is provided to allow property investors, tenant companies, retailers and distributors time needed to re-tool their operations.
Amy Erixon is and Avison Young Principal and Managing Director Investments. Amy is based in the Toronto headquarters office.
Amy Erixon is and Avison Young Principal and Managing Director Investments. Amy is based in the Toronto headquarters office.
Tuesday, February 7, 2017
By Rand Stephens (Houston)What a difference a year makes! As 2016 got started with $28 oil, there were a lot of glum faces around town and the mood in Houston took on a feeling of pessimism. Houston’s optimism grew over the year as oil prices increased steadily, but even at mid-year the general mood was still gloomy. Prognosticators were already predicting a dire 2017 with no real improvement in the Houston economy until 2018.
However, oil prices have done nothing but rise since that ominous low point and the year turned out much better economically than anyone predicted...
2016In 2016, the housing, industrial and retail real estate markets have all remained strong. However, multi-family is oversupplied and vacancy rates have increased. Fundamentals also declined in the office market; particularly in west Houston where the drop in the price of oil has had its most damaging effects. Transaction volumes were down across all real estate sectors, which is to be expected, as cautiousness and conservatism has been the prevailing sentiment for the Houston economy as a whole. However, there is not a trend of distress in the real estate markets as acquisition and development have been responsibly underwritten and financed since 2009.
As a result of the “staying power” property owners have gained from responsible financing, investment sales activity will continue to be slow in 2017 until rental rates, particularly in the office and multi-family markets, recover to a point where buyers can rationalize asset values.
The industrial market has held up very well through this downturn with occupancy rates remaining well above 90% and industrial development will start up in 2017. Most of the big industrial developers in Houston are primed with sites and ready to start building; but even for the biggest and best, new development will likely require a lead tenant to kick things off.
The retail market is complicated because continued growth in online shopping has traditional retailers scratching their heads as to their “brick and mortar” needs. This industry trend that has generally put a damper on development while retailers continue to adapt to consumers use of technology to shop. Nonetheless, like the rest of the country, Houston has strong demand for dining, entertainment and lifestyle alternatives—despite the city’s economic downturn. Since these shopping needs generally can’t be satisfied online, 2017 will likely see growth in specialty retail (adaptive reuse, mixed-use), which thrives in and around Houston’s core. Traditional shopping center development will continue in the suburbs, but the days of vigorous big box retail expansion are over as traditional retailers adjust to the consumers new buying behaviors.
Houston will see improved job growth in 2017 as the upstream energy business has retrenched over the last two years and will slowly start growing again. This along with job growth in other sectors should mean the office market has bottomed-out and occupancy and rental rates will stabilize and possibly see improvement this year. So, with oil at $53 a barrel as we start 2017, and positive job growth since the beginning of the downturn in Q4 of 2014, Houston’s spirits are better, and the mood is now one of guarded optimism.
Tuesday, January 31, 2017
By Marissa Rose (Chicago), Amit Parekh (Los Angeles), Hilary Kellar-Parsons (Toronto) and Michael Ganz (Irvine, CA)
A current theme in retail real estate, as in many other industries, is disruption. Reoccurring throughout 2016, particularly at the 2016 ICSC NextGen Conference in Los Angeles, were key conversations on this trend. Some of Avison Young’s retail affinity group’s young professionals had the privilege of attending the conference and getting to hear speakers from several key companies driving the disruption of the retail industry.
Retail real estate is undergoing a transformative and dynamic shift, due in part to disruption from technology, integration with existing shopping centers and consumer experience. This disruption results in improved consumer shopping experiences, investors raising capital through crowdfunding in local communities and changes in the ways that retailers allocate product through seamless channels of distribution.
Attended by four Avison Young up-and-coming real estate professionals, the ICSC conference showcased various perspectives on how disruption is affecting the retail real estate industry across North America. Impressive panelists and presenters included senior members of the retail real estate community, including designers, in-house real estate executives, investors, and market experts who were able to give their opinions and thoughts about how disruption is affecting their businesses and the retail sector in general from a theoretical perspective. Next, bus tours allowed attendees to touch and feel the physical retail spaces discussed during the conference – one tour included various hot new Los Angeles retail destinations. This tour provided a great opportunity to see first-hand how new retail developments and retailers are adapting their retail platforms to embrace and capitalize on the disruption that the retail world is facing. A key lesson is that much of what is going on in the industry is driven by the desire of millennials to live-work-play in urban areas, and their concentration in city centres – specifically locations where they are near their offices and surrounded by retail properties where they can shop, eat, and socialize.
The biggest take-away that was evident at the conference was that disruption was never really about disruption, but instead about finding the gaps in customer offerings and filling those gaps through innovative and creative approaches to retailing. Many retailers embracing this trend have been dubbed as “disruptors” as a happy accident. When many of these retailers set out, their goal was to explore the gap, listen to what people wanted, and then create a retail experience curated specifically with customer desires in mind. In an industry where you must “adapt or die,” these companies found a way to take innovation a step further, and many are experiencing sizable growth as a result. A common trend is that these retailers have really embraced consumer preferences, which have shifted; consumers now desire value, authenticity, and/or meaning in their retail experiences. Companies like SoulCycle and ShakeShack have been able to fulfill these wishes. Because of this shift, the darlings of the retail industry, like Macy’s and Gap, have really struggled to withstand change. Macy’s and Gap have struggled to instill the brand loyalty seen in so many of today’s successful retailers.
Lion Capital’s Sherif Guirgis shared with the attendees an investor’s perspective on the changing retail landscape and about the changing ways in which retailers are valued in the current economy. He echoed many of the above sentiments about current retail trends and about the importance of customers’ experience to not only the brand as a whole, but the brand’s value in the financial world.
(Marissa Rose, Amit Parekh, Hilary Kellar-Parsons and Michael Ganz are up-and-coming Avison Young Associates who specialize in retail sales and leasing services. Rose is based in the firm’s downtown Chicago office while Parekh works out of downtown Los Angeles; Kellar-Parsons advises Toronto-area retailers and Ganz assists clients in Irvine, CA. Services that the four brokers provide include landlord and tenant representation, sale and lease negotiations, and market analysis.)
Posted by Avison Young Guest Blogger at 11:05 PM
Tuesday, January 24, 2017
By Jesse Fragale (Toronto)
A few months ago, the Rotman School of Business in Toronto, in partnership with the Urban Land Institute, hosted an event entitled Is Toronto’s Real Estate Environment Healthy For Entrepreneurs? On the panel was an array of experienced individuals, including the CEO of a growing fin-tech company, the director of operations of a popular incubator and the head of a major office REIT. The event was packed – an indication of how relevant the question has become.
As a commercial real estate (CRE) broker in Toronto who specializes in office leasing, I am well aware of the challenges that startups have in acquiring the right office space in their early years. Conversely, from working with clients on the landlord side, I can appreciate the hesitation to lease space to these types of companies.
1. 1. Uncertain growth trajectory
Companies that are at the first few rounds of financing in their new venture, or at earlier stages, have an incredibly difficult time estimating a growth pattern with any sort of precision. Their growth is certainly not perfectly linear, and this factor poses a challenge for brokers in finding not only the right space, but the right space for now. Companies at this point in their evolution are just not in a position to make commitments of five years or more without being exposed to some significant financial risk. Abstractly, we can think of these companies’ growth as a curved or exponential line on a graph, and office needs as a line that looks like a staircase – once the company is too big for the space, the firm hits a wall and needs to expand (a new step). We need to place this set of stairs over top of this growth line as precisely as possible.
2 2. Covenant
When tasked with making a commitment to office space, landlords expect that they will be able to hedge their risk with a solid covenant from the tenant. When market conditions dictate that landlords have more bargaining power, they will be less likely to gamble on new ventures that have more potential to “go sideways.” As a result, startups can find it difficult to secure an office location without having a track record. This track record will typically mean a minimum of a few years of profitable operating history.
3. Disconnect from the commercial real estate community
I believe that this point is the most controversial of the three challenges, but I believe it is real and should not be overlooked. The majority of these companies are being run by millennials and hiring millennials. Although the CRE industry is becoming more and more innovative, we are still behind in our engagement with millennials today – there is a lack of presence and engagement on social media platforms that they use every day (Snapchat, Instagram, YouTube, etc.)
What’s a startup to do?
Subleases, shared office, collaboration, oh my
Five- and 10-year deals are just not going to be an option for many startup companies. Potentially discounted subleases can lower upfront capital expenditures and shorten time commitments to make these companies more nimble. Shared offices and collaborative work environments are other good options, provided the clients are amenable to these arrangements and do not require exclusivity/use clauses (i.e. a clause whereby the landlord agrees not to rent space to another tenant that directly competes with the company that has said exclusivity.) Shared space has become an attractive option over the past few years as we see more co-working groups on the scene in major cities.
No easy way out
Creativity might not cut it here as landlords – in lieu of an operating history – may ask for letters of credit, personal indemnification or upfront rent to compensate their risk. As a broker, the worst thing you can do in this regard is not have an upfront discussion of these potential requirements right out of the gate. The last thing you want to do after negotiating an offer or letter of intent is not be able to waive financing conditions at the 11th hour because you were ill prepared.
Engage, engage, engage!
Furthermore, startup clients should focus on retaining representation from brokerages that make an effort to communicate and engage with them – brokerages that understand their challenges and offer solutions. Staying relevant and using all the resources you have available to you is crucial. Beyond that, brokerage firms should reach out to incubators, accelerators, business schools and like minded landlords who target startups or other dynamic tenant groups (for example TAMI tenants; technology, advertising, media, information). Engaging and spending time prospecting startups is not without risk. Many of these companies fail before they get their feet off the ground. A proficient broker will evaluate new-venture clients more intensely and take a venture capitalist approach when targeting these companies. Does the business make sense? Are the principals committed? What have they accomplished to date? Ultimately, engagement must be a calculated endeavour and as efficient as possible.
The bottom line
A mentor and founding partner at Avison Young once said to me, “Jesse, think of two rotating gears when working with any company. The large gear is human resources and the little gear is real estate. The large gear costs the company much more than the little gear and looks more important – but if you screw up on the little gear, the large gear will grind to a halt.”
Startups should be focused on their business and not get bogged down in acquiring new office space. Brokers who represent these types of tenants need to ensure that they provide solutions that position clients in an optimal place for future growth and success.
(Jesse Fragale is an office leasing advisor who specializes in tenant representation focusing on startup and tech firms. Based in Avison Young’s Toronto office, he focuses on the Downtown and Midtown markets. Fragale is currently completing a Master of Business Administration (M.B.A.) degree in Finance and Strategy from Wilfrid Laurier’s Lazaridis School of Business. He holds a Bachelor of Arts degree in economics. He has also completed a joint program on negotiation through Harvard University and the Massachusetts Institute of Technology (MIT).
Posted by Avison Young Guest Blogger at 10:08 AM