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Monday, May 29, 2017

Why co-working space is increasingly attractive to today’s office tenants

By Carl Condon (Austin, TX)

It’s no secret that co-working is one of today’s hottest trends. To help put the dynamic growth in perspective: Only a handful of executive-suite providers existed in Austin, TX five-plus years ago, whereas today there are more than 20 such businesses in the city leasing out as much as 400,000 square feet (sf) of space.  According to Jason Saltzman, CEO of collaborative workspace provider Alley and guest writer for Entrepreneur magazine, some 70,000 co-working spaces are used globally, and Deskmag – a magazine devoted to co-working – predicts that 1 million people will conduct business out of shared space by 2018.

According to multiple reports, the most common advantages of the co-working phenomenon are: Community, connectedness, collaboration, networking, and peer-to-peer learning. While all of these benefits are true, there are four other business and/or real estate reasons why today’s tenants find co-working environments so attractive.

1. Low capex requirement

Young and/or growth-oriented companies that are focused on building their management teams and initial products may have raised early rounds of funding, but cash remains king. In a tight marketplace like Austin, where attractive traditional lease options are limited, tenants frequently sink significant dollars into such capital expenditures (capex) as design, construction, new furniture, telephone/cabling and so forth. On the other hand, co-working space providers have already invested upfront capital into their locations. While a co-working tenant may cover these costs over the term of a lease, the saving of a large upfront cost allows a younger company to use its capital on the business, whether it be for hiring new employees or building its product.

2. Scalability

Five-plus years ago, the traditional executive-suite model leased out individual enclosed-office spaces. Enclosed-office configurations made sense for both young and mature companies looking to expand their presence in a particular market, but the economics and functionality of the spaces became obsolete once the business grew beyond five or 10 people. Today’s co-working spaces are designed much more effectively, allowing for team rooms and glass walls that bring in natural light within all portions of the space. Such attention to design easily enables companies to scale upwards of 30-50 people within the same building or space, keeping relocation costs to a minimum and productivity high.

3. Flexible lease terms

In a supply-constrained market that includes older and outdated spaces alongside newly constructed product, a tenant is often required to accept a longer lease term – of up to seven years or more – for traditional space. A long-term lease is not always a good fit for a company that does not have a clear vision of where its business will be in two years. Five or seven years can feel like an eternity for technology companies undergoing constant change. However, co-working space providers are more than happy to sign three-to-12-month leases or even go month to month. That’s a significant difference.

4. Proximity to amenities

To attract and retain the best talent today, companies must offer employees more in the way of amenities, such as workout facilities, showers, and restaurants/bars within walking distance of their workplaces. Co-working spaces typically locate close to amenity-rich environments, building upon the importance of community and connectedness.

In the past, these environments mostly attracted early-stage startups and freelancers. Now, even large corporate users are getting the message. IBM recently leased an entire 10-story, 86,000-sf building from co-working space provider WeWork in New York to accommodate up to 600 employees. In terms of the space size, this deal represents a landmark co-working lease transaction. But David Fano, WeWork’s chief product officer told The Real Deal New York that major companies have exclusively taken 30 full floors in WeWork buildings. Furthermore, large companies with more than 500 employees account for 20% of WeWork’s membership.

Co-working space is not for everyone. Disadvantages include distractions, noise, potential employee poaching and the lack of a stand-alone company identity and culture. However, the aforementioned benefits are real – and hard for a business to ignore.

It is expected that more and more companies – both small and large – will consider co-working space as a potential option for their businesses.


(Carl Condon is a Principal of Avison Young based in the firm’s Austin, TX office. He specializes in office tenant representation, acting for leading corporations and local organizations alike.)

Wednesday, May 24, 2017

At the forefront of Downtown Toronto’s latest development

By Bill Argeropoulos (Toronto)

In 2012, Avison Young became the first – and only – commercial real estate brokerage firm to relocate its offices to Toronto’s burgeoning Downtown South node.

Since then, from front-row seats, our global headquarters employees have watched an unprecedented period of development unfold.  Of the 10-million-plus square feet of office space that has been delivered in Downtown Toronto since 2009, and continues to be built, nearly half is located south of the railway tracks.

I witnessed the launch of this story’s next chapter on the morning of May 17, when members of Cadillac Fairview (CF) and Ontario Pension Board (OPB) officially broke ground on their latest project, 16 York Street. (Avison Young’s headquarters is located across the street in PwC Tower, part of the Southcore Financial Centre.) With 32 storeys and 879,000 square feet, 16 York will complete the final corner at the intersection of York Street and Bremner Boulevard – culminating the redevelopment of four sites that, only a decade ago, were gravel parking lots.

I’ve seen a few development cycles in my 29 years of following the Toronto commercial real estate market, but nothing like the one that started in Downtown South in 2006 with the announcement of a new tower to be built for Telus by Menkes Developments. Ever since, I have seen an ongoing roster of organizations make the move to Downtown South – including many so-called traditional firms previously housed only in the confines of the Financial Core, such as PwC, CI Investments, RBC, RSA, Marsh & McLennan and, more recently, Sun Life and HOOPP. These organizations are now rubbing shoulders with tech giants such as Amazon, Apple, Cisco Systems and Salesforce, with others expected to follow suit.

The 16 York project demonstrates the faith that the Downtown South market (increasingly referred to as the South Core) has generated among developers. Both CF and OPB elected to commence construction before securing a lead tenant, giving the node a strong vote of confidence.

From our Avison Young headquarters vantage point, we can also watch the construction of Ivanhoé Cambridge and Hines’ massive 2.9-million-square-foot Bay Park Centre development, which is following on the heels of 16 York. Home to CIBC’s new headquarters of up to 1.75 million square feet, Bay Park Centre will straddle the railway tracks, bridging the Financial Core and Downtown South office nodes.

Given all of this activity, only a handful of remaining sites can accommodate future downtown office development, which the market will be watching closely as we work our way through this cycle. Once these sites are fully utilized, the natural progression will be to push development eastward along the waterfront. Stay tuned for further updates and announcements as the ongoing development wave carries us into the next decade.

(Bill Argeropoulos is an Avison Young Principal and the firm’s Practice Leader, Research (Canada). He is based in the company’s global headquarters in Toronto.)


Monday, May 15, 2017

Single-digit vacancy rates define rapidly evolving North America and U.K. industrial sectors

By Mark E. Rose (Toronto)

The industrial property sector continues to be characterized by sound fundamentals, irrespective of geography and geopolitical and economic conditions. Record-low or near-record-low vacancy rates, owing to robust demand, are placing upward pressure on rental rates. Development costs are also on the rise, due to dwindling land supply in some markets. Meanwhile, developers strive to deliver modern product to meet evolving tenant demand – increasingly driven by the retail sector and its goal to feed today’s insatiable consumer appetite. 

These are some of the key trends noted in Avison Young’s Spring 2017 North America and U.K. Industrial Market Report, which covers the industrial markets in 55 North American and U.K. metropolitan regions: https://avisonyoung.uberflip.com/i/822225-ayspring17namericaukindustrialreportmay11-17final

The industrial property sector’s metrics continue to impress the market as occupiers and investors alike are drawn to the sector’s stability. Though traditional manufacturing operations remain part of the industrial fabric, surging demand for online shopping – while causing disruption in traditional brick-and-mortar retail properties – has provided immense opportunities in industrial plant, distribution and warehouse assets as supply chains become increasingly complex and seek efficiencies. An increasing urban population base also means feeding the unquenchable demand of a fickle and growing consumer market that demands cost-effective, same-day delivery options.

There is one recurring statistic in virtually every market and country under our coverage – low vacancy rates. All but two markets posted single-digit vacancy at the conclusion of the first quarter of 2017. Keeping pace with demand, the development community delivered more than 218 million square feet (msf) over the past 12 months and had more than 205 msf under construction at the end of the first quarter. In increasingly land-constrained markets, developers are being forced to think outside the traditional warehouse footprint and are even contemplating multi-storey warehouses.

Of the 55 industrial markets tracked by Avison Young across North America and the U.K., which comprise almost 14 billion square feet, vacancy declined in 40 markets, remained unchanged in two and increased in only 13 during the 12-month period ending March 31, 2017.

The analysis revealed lower year-over-year industrial vacancy rates in 30 of 41 U.S. markets and seven of 11 Canadian markets. Logistics-driven demand cut Mexico City’s industrial vacancy rate by half to 3.2%, while in the U.K., the Coventry and London markets reported vacancy rates of 5.8% and 2.7%, respectively.

Tuesday, May 2, 2017

Top 10 tips to achieve a smooth leasing transaction

By Eric Horne (Calgary)

Signing a commercial lease for your business can be one of the largest financial commitments that you make. It affects the image that you project, the ease of access to your clients and the happiness of your employees. In my 10 years in the commercial real estate industry, I have seen numerous businesses make the deal process significantly harder than it has to be – or struggle needlessly – because they didn’t have an effective strategy. Below are the 10 most critical things to do in order to achieve a smooth leasing process.

Top 10 tips for tenants in commercial real estate leasing transactions
  1. Understand your rights and liabilities in your existing lease.
  2. Use a qualified agent, broker or advisor to provide value and help educate final decision-makers
  3.  Understand the market and what leverage you have.
  4.  Clearly understand your space requirements for today and for the future.
  5. Act in a timely manner during the decision-making process.
  6. Develop a strategy at the beginning of the process.
  7. Finalize your internal and external team members for this process.
  8. Give yourself adequate time to complete a deal comfortably.
  9. Consider factors beyond the financial costs and what terms are open for negotiation
  10. Make your decision with confidence.


Planning ahead and engaging the right support team are the best things that you can do for yourself and your business. I encourage any company that currently leases commercial space to review its lease. If it is within a year of expiring, start the conversations now. If you are looking to lease for the first time, my advice for you is to do your homework, get some good assistance and make a plan.

A licensed broker can help you understand the current market conditions and grow your business –without experiencing needless headaches.

(Eric Horne is a Vice-President of Downtown Office Leasing in Avison Young’s Calgary office.)


Wednesday, April 26, 2017

My take on the Trump Effect

 By Blake Thomas (Raleigh)  

For the business community, and more specifically the capital markets, 2017 began with a lot of optimism.

Much of this increase in market confidence could be attributed to the unprecedented November 2016 election of President Donald Trump and of Republican majorities on both sides of Congress. The decisive victories represented a drastic shift within the federal government, gave the Republicans a clear path to policy reform, and signaled to the world that the American people were tired of business as usual, or to be more precise, gridlock as usual, in Washington, DC. Trump’s agenda on the campaign trail and during his first few months in office has been focused on pro-business, pro-growth policies. The pillars of Trump’s Republican agenda have been centered around tax reform, a rollback of Obama-era regulations (specifically in the banking and healthcare sectors), increased defense and infrastructure spending (with corresponding cuts to entitlements and various government agencies), and revised trade policy (think: China and Mexico). The markets are now reflecting the potential impact of these policies as though reform is actually possible in Washington. But, to date, reform largely remains to be seen – outside of executive orders.

Market exuberance was evident immediately following the election results when the 10-year treasury (10-Yr UST) jumped to 2.063% on November 9 from 1.857% on November 8 – a 20.6-basis-point surge overnight. This increase in the long end of the yield curve was not driven by a massive selloff of this financial safe haven by global institutions due to some economic crisis or policy but, rather, a clear signal from investors of strong economic growth expectations.

Remember that nominal interest rates, like the 10-Yr UST yield, comprise two components: real interest and inflation, both of which are impacted by anticipated economic growth. Investors now have higher real interest rate expectations due to greater opportunity costs within the broader capital markets. Moreover, since the U.S. economy had been bouncing along the bottom for the last eight years with inflation below the Fed growth target of just 2%, it does not seem like a stretch to say that the market began suddenly pricing in higher inflation given the expectations for a faster-growing economy. More good economic news came within five days of President Trump’s inauguration, when the Dow Jones industrial average (Dow) crossed 20,000 for the first time in U.S. history. For all but a few days in late January since, the Dow has stayed above this historic mark, peaking at more than 21,000 on March 1. This equity market run-up enforces the notion that there are greater yielding opportunities for capital markets participants. And recently, another key economic indicator, the Conference Board’s U.S. consumer sentiment index, reached its highest level in 16 years.

But what do these gains mean for commercial real estate (CRE)? While the current administration is focused on promoting faster gains in the economy, there will be pluses and minuses for CRE – as well as winners and losers. Following the Reaganomics formula, tax reform should be a boon for overall economic growth by making the U.S. a more competitive environment for businesses in the global marketplace. Proposed corporate tax rate cuts should encourage companies to reinvest in their core businesses, providing additional job and wage growth as well as capital investments in plants and equipment. As such, tax reform is expected to help drive demand for CRE space and continued rent growth. However, along with these proposed tax reforms there have been discussions regarding the elimination of tax deferrals like 1031 exchanges – a move that would negatively impact CRE liquidity and affect all market participants and product types.

Rolling back banking regulations, such as the new risk retention rules of Dodd-Frank and Basil III, would increase liquidity and promote further investment and development in CRE. Although some might argue that, due to the increased regulations, fundamentals have remained in check and helped prolong this latest cycle. Infrastructure investment in roads, bridges and railroads should also provide a lift to CRE as long as commodity prices do not rise significantly due to increased demand for raw materials to support the new public works projects. This type of government spending is designed to not only address our nation’s aging and decaying infrastructure, but also to aid the president’s push to bring back manufacturing and provide additional higher-than-average paying jobs to the U.S. economy. Increased infrastructure investment and wage growth have the potential to bolster CRE values further.

The big question mark surrounds trade and immigration reform. More restrictive trade and immigration policies could undermine economic growth – with the industrial and retail real estate sectors having the most to lose. A near-term reduction in U.S. trade would likely reduce industrial space demand. Ultimately, domestic manufacturing would need to satisfy consumer demand for goods if imports fall. A reduction in imports could lead to wholesale changes in location demand as companies reconfigure supply chains and distribution for domestic fulfillment. The proposed border tax could increase the costs of retailer inventories through a tax on imports, though the U.S. dollar could strengthen and offset the impact.

In most cases, I believe that long-tenure, single-tenant net leased (STNL) retail and healthcare properties could see the smallest benefits from the current administration’s pro-growth policies due to fixed-rent escalations already embedded into pre-existing lease agreements. STNL retail and healthcare properties could even suffer valuation declines if stronger economic growth is accompanied by higher inflation and interest rates – a situation that could increase cap rate spreads and, ultimately, negatively impact reversion values.

In general, market confidence in CRE is warranted in the near term, with significant positive impacts to all product types expected. If some proposed pillars of the Republican agenda promoting wide-scale economic growth come to fruition, then office, industrial and multi-tenant retail properties should see continued healthy rent growth – a trend that would likely offset a cap-rate expansion. Tax reform already seems to have been priced into the markets, and if the administration is unable to push legislation through, a pullback in debt and equities will likely occur.

However, if tax reform is approved by Congress, then the CRE sector may see additional lift due to the removal of the uncertainty surrounding tax reform.

(Blake Thomas is a Vice-President with Avison Young’s capital markets team in Raleigh.)



Thursday, April 20, 2017

Where does sustainability fit into your investment strategy?

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.)

Sunday, April 9, 2017

Calgary Stampede chuckwagon tarp auction an indicator of local business confidence

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.)


Thursday, March 23, 2017

Quality tenant representation improves office leasing experience

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.)






Friday, March 10, 2017

Avison Young wins Canada’s Best Managed Companies award for sixth consecutive year

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

Implications of Proposed US Tax Changes and Protectionist Policies on Real Estate Industry

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. 

Tuesday, February 7, 2017

Houston Real Estate: A 2016 Review and Predictions for 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...

2016

In 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.

2017

Investment Sales
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.

Industrial
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.

Retail
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.

Office
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.

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